Using exchange-traded funds (ETFs) as investing options in 401(k) plans is becoming increasingly popular as firms realize that ETFs offer participants a lower-cost option than mutual funds. Last month, Fiserv Invest- ment Support Services teamed up with the Institute for Wealth Management (IWM) to provide plan sponsors who hold assets at Fiserv with ETF portfolios that use research provided by well-known institutional money managers.
The trend now is to create managed portfolios for 401(k) plans using ETFs instead of traditional mutual funds. More and more advisors are also acting as investment consultants for fairly large plans–those with $10 million to $50 million in assets–and want to bring an institutional portfolio solution to those plans. In some cases, however, the advisor “will choose not to manage the portfolios himself, but rather will find the best institutional management solution for the plan,” says John Newman, VP of the product management group at Fiserv.
Come the third quarter, Fiserv plans to allow advisors to access institutionally managed portfolios through the IWM, which includes Neuberger Berman and Wilmington Trust. IWM is an RIA that evaluates and monitors portfolios on behalf of the advisor and plan sponsor. To help accommodate the new ETF business, Fiserv last year “developed new portfolio accounting services capabilities, so we can now accommodate all types of portfolios and all types of securities,” Newman says.
Fiserv says it will track the assets of, and calculate a daily net asset value (NAV) for, each ETF investment portfolio. The daily NAV will then be reported back into the third-party administrator’s participant recordkeeping system alongside all mutual fund NAVs for the plan.
Fiserv’s offering with IWM is the “first of multiple institutional manager and ETF portfolio solutions” that Fiserv will be offering, according to Newman. The other offerings will include “additional institutional managers and they will include true separate accounts on behalf of plans.”
The Virtues of ETFs . . .
Christopher Traulsen, a senior analyst at Morningstar, says ETFs are generally cheaper because, unlike mutual funds, “they don’t deal directly with investors and don’t have all the shareholder servicing costs of a mutual fund.” ETFs are also more tax efficient than a mutual fund following the same index, and ETFs can be traded intraday, he says. But to Traulsen, the cost benefits of ETFs aren’t “particularly clear cut these days,” given the fact that mutual fund firms like Fidelity have index funds that charge 10 basis points, “which is less than what a lot of ETFs charge.” He also wonders whether participants in a 401(k) plan would be charged brokerage commissions for buying and selling ETFs in the plan.
Not at Fiserv, Newman says, because the trading is handled at the portfolio level, not by participants. “There are no transaction charges for participants to move in and out of the ETF portfolios,” Newman says. “The portfolio itself is trading the ETF position, and then when we have multiple portfolios trading the same ETF positions, we can block up those trades and allocate the shares back to the portfolios.” He adds: “The portfolio incurs the trading expense, and when it’s blocked up across multiple portfolios, participants are incurring [only] a portion of the trading expense.”
. . . and Their Disadvantages