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January 01, 2008 at 02:00 AM
Traditional mutual funds still rule the $2.5 trillion 401(k) marketplace, but that could soon change. Target-date ETFs have crashed the party.
In October, XShares Advisors launched five target ETFs that follow Zacks Lifecycle indices. The funds have laddered retirement target dates that range from 2010 to 2040 and charge annual expenses of 0.65 percent, lower than the layered expenses that mutual funds with a similar strategy charge (0.73 percent, and that’s not counting the cost of owning the underlying funds).
The main idea behind target-date funds is to simplify the process of asset allocation because the mix of stocks and bonds automatically adjusts as the target retirement date is reached. As the projected retirement date approaches, the allocation to stocks is generally reduced while the allocation to bonds is increased.
Target-date funds have become such a hit with fund investors saving for retirement that according to Lipper, there are now 205 such funds with roughly $160 billion in assets — about 91 percent of it in retirement accounts. Over the past five years, asset growth has been growing at a stellar pace of 65 percent.
Could target-date ETFs enjoy this sort of success? As promising as the prospect looks, some industry observers have their doubts.
“Target-date ETFs will not be able to compete in the 401(k) market because of the same problems facing all ETFs,” argues Darwin Abrahamson, CEO of Portland, Ore.-based Invest n Retire, which has developed a proprietary system to help 401(k) sponsors process ETFs. “Retirement plan providers do not have the technology to trade and record-keep ETFs like us.”
