With almost $1 trillion in assets and growing, it’s pretty clear financial professionals have embraced ETFs. But one place that has been slow to adopt them is 401(k) retirement plans. That’s because the vast majority of today’s 401(k) plans are built upon legacy systems that only accommodate mutual funds.
However, changes in the way 401(k) plans are administered could accelerate the usage of ETFs.
The Department of Labor recently issued updated disclosure requirements for 401(k) plans. Under the new rules, 401(k) plans must fully disclose administrative charges, investment fees and other costs. Furthermore, workers must be provided a glossary of terms explaining investment options and fees. The disclosure rules, which take effect in 2012, could force more 401(k) sponsors to embrace lower cost ETFs.
The Center for Retirement Research at Boston College endorsed the idea in a paper titled, “Reducing Costs of 401(k) Plans with ETFs and Commingled Trusts.”
“Restructuring the plan to include commingled trusts and ETFs can reduce explicit expenses and transaction costs without giving up the investment objectives offered by actively-managed funds,” states the report.