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Portfolio > ETFs

ETFs Reach for Share of 401k Market

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Portland, Ore.-based retirement plan manager Invest n Retire recently made the developing trend of ETFs popping up in more and more employer-sponsored retirement plans the focus of its second annual 401(k) conference.

Darwin Abrahamson, the firm’s CEO and founder, opened the conference with an overview of the mutual fund industry’s history from its humble beginnings in 1924 all the way to current development of ETF products, then launched into a discussion of the progress of ETFs inside 401(k) plans.

In the past, 401(k) sponsors had to go through the clumsy process of establishing brokerage accounts for their employee participants and pay brokerage fees for each ETF transaction. Invest n Retire’s proprietary software has solved this problem by bundling ETF trades together and offering portfolio models that match up with each participant’s risk tolerance level. According to Abrahamson, the company’s ETF portfolios are less expensive to manage and offer performance returns that rival comparable mutual funds.

Brian Reid, chief economist at the non-profit industry group Investment Company Institute also spoke, addressing the economics of the retirement plan business. Defined contribution plans and IRAs account for roughly half of the $14.7 trillion in retirement assets. Reid highlighted the huge potential for further growth, especially given the potential impact of developments like automatic enrollment in 401(k) plans.Jeremy Held, national sales manager at the Select Sector SPDRs, discussed the important role of ETFs in asset allocation models. “ETFs didn’t invent asset allocation,” Held notes. “They made it cheaper and more efficient.” In his presentation, he commented on key problems facing ETF investors, including lack of diversification, not having a rebalancing strategy and incorrectly estimating risk tolerance.

Jeff Robertson, an attorney specializing in employee benefits and ERISA law, dazzled the crowd with his captivating speech on the sweeping effects of August’s Pension Reform Act of 2006. This massive work of legislation represents the single largest change in the retirement planning arena since 1974, when the Employee Retirement Income Security Act (ERISA) was passed. Integral parts of the Pension Reform Act will make both automatic enrollment and investment advice readily available to plan sponsors and participants alike. Additional provisions all but eliminate the liability of plan sponsors for investment advice rendered to their participants — as long as they’ve hired an ERISA fiduciary.

One hot topic at the conference was the fees being charged to 401(k) plans. “New laws are requiring greater fee disclosure of revenue sharing arrangements inside 401(k) plans and fiduciaries are being put on notice with lawsuits,” observed Abrahamson.

Once upon a time, ETFs were viewed as a liability inside 401(k) plans. However, ETFs have lower expense ratios than most traditional mutual funds and don’t charge any hidden fees, and so it is likely that legislative changes will accelerate the expansion of ETFs inside retirement plans.


Even dummies want to know about ETFs. And now, thanks to a new book targeting them specifically, they’ll get their chance.

Exchange-Traded Funds for Dummies (2006 Wiley) hit the bookstores in November. The book follows the path of Wiley’s popular “dummy” series by taking a simplified no-nonsense approach to explaining how ETFs work.

The book was written by Russell Wild, MBA. In addition to being a financial advisor with his own advisory firm, Wild has authored more than 200 articles for major magazines including AARP The Magazine, Men’s Journal, Consumer Reports and Working Woman. Wild is also a member of the National Association of Personal Financial Advisors (NAPFA).


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