Still, ETFs account for a very small piece of target-date fund assets. As of Aug. 31, open-ended target-date funds had $842.14 billion in assets but ETFs represented only 2%, or $16.83 billion, of that, according to Morningstar. (The firm's research excluded closed-end target date funds and target-date portfolios using collective investment trusts.)
“The ETF by itself is not the (investment) strategy,” said Jeff Holt, Morningstar's associate director of manager research. “It's a vehicle. It's a way to lower costs, but it's not the only way.”
The efforts by the all-ETF providers come at a time when ETFs in general remain a tiny component of the DC market and more popular with smaller plans.
In a report to be released next month, Cerulli Associates found that ETFs represented less than 1% of 401(k) assets in 2015, said Jessica Sclafani, associate director, retirement, for the Boston firm. Stand-alone ETFs are most likely offered by plans with assets of $25 million or less, she said.
“Cerulli is not bullish on further expansion of ETFs in DC plans unless they are being used as underlying investments in a packaged product” like a target-date fund, she said.
“The target audience (for ETFs) is primarily small-plans where an outside adviser is involved,” said Winfield Evens, a partner at Aon Hewitt, Lincolnshire, Ill. His firm's DC clients — large and midsized plans — “don't see a cost advantage” to ETFs.
“For most midsized plan sponsors and larger plans, this model doesn't have any traction because the client can just use existing collective investment trusts, which are cheaper even than ETFs.”
If clients offer ETFs, they do it through self-directed brokerage accounts, he added.
“It's making something available that's not being asked for by participants,” said Martin Schmidt, principal at HS2 Solutions, Chicago, a retirement plan and technology consulting firm. Most of his clients have DC assets ranging from $150 million to $5 billion-plus, although some have assets in the $25 million to $30 million range. If they use ETFs, they will offer a brokerage account, he said.
Jennifer Flodin, Chicago-based DC practice leader and senior consultant for Plan Sponsor Advisors, a division of Pavilion Advisory Group Inc., hasn't heard requests for ETFs as core investments or white-label investments. “I don't see the benefit of doing this in defined contribution plans at this point,” said Ms. Flodin, whose DC clients hold assets ranging from $20 million to $8 billion.
DC plans may be thwarted because their record keepers' platforms can't — or won't — accommodate intraday trading of ETFs, she said. Expanded use of ETFs in DC plans will depend on more record keepers establishing platforms to handle trading intricacies, she said.
Aon Hewitt's Mr. Evens said his firm's record-keeping platform could accommodate ETFs if needed. “We would not do intraday pricing unless there is client demand,” he added. “Today, there is no demand.”