Some big names in the retirement industry are skeptical about the use of exchange-traded funds by big defined contribution plans or even midsized plans.
Vanguard Group Inc., Malvern, Pa. eschews the use of ETFs for its full-service plans — those for which Vanguard provides direct record keeping, John Woerth, a company spokesman, wrote in an e-mail.
As of Aug. 31, Vanguard had $600 billion in total ETF assets under management.
Although ETFs can provide “low-cost access to indexing, they may not necessarily be the lowest-cost option,” Mr. Woerth wrote. “At Vanguard, plans that are able to meet the minimum purchase requirements gain access to institutional-class-share mutual funds, commingled trust funds, and separately managed accounts at a meaningfully lower cost than ETFs.”
The only institutional DC accounts offering stand-alone ETFs are those in the Vanguard Retirement Plan Access program, which caters to small plans with retirement assets of less than $20 million. Eleven percent of these plans offer ETFs, while 9% have assets in ETFs, Mr. Woerth wrote. Among participants with access to ETFs, 18% in the program use them.
He didn't provide an asset total for the VRPA program but said it serves 4,500 plans with more than 203,000 participants.
Full-service Vanguard clients can use ETFs in self-directed brokerage accounts, he added. Sixteen percent of plans offer these accounts, and 11% of assets in brokerage accounts are invested in ETFs.
Fidelity Investments, Boston, “does not support ETFs as a designated option within a 401(k) plan,” spokesman Michael Shamrell wrote in an e-mail.
“Fidelity believes index mutual funds are more suitable than index ETFs for workplace savings plan participants seeking passive exposure to the capital markets,” he added. “Index mutual funds offer the same key advantages as ETFs without the potential to incur excessive trading costs, and any other ETF advantages are generally irrelevant to retirement plan investors.”
Among clients, “we are not seeing much interest in adding ETFs to the fund lineups for DC plans,” he added. Sponsors wishing to offer ETFs can use a self-directed brokerage account.
ETF providers don't view the DC market as a big opportunity, according to a July report by Cerulli Associates, Boston. Only 8% cited public DC plans as primary target markets for the next 12 months, said Jennifer Muzerall, associate director, asset management, for the Boston-based firm.
Only 4% mentioned private DC plans as primary targets, said the report based on a survey of more than 30 ETF providers who accounted for 96.9% of total U.S. ETF assets.
The most desired primary targets — each receiving a 46% response — were endowments, foundations and institutional asset managers, the Cerulli report said.