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ETFs and 401(k)s: The Romance Begins

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ETFs have grown enormously over the past 20 years, and 401(k) plans have grown over an even longer period of time, and yet the twain have hardly met.

There are some small companies like Invest n Retire that specialize in providing ETF retirement platforms. Yet in a panel discussion of the 900-pound gorillas in the ETF space held at IndexUniverse’s InsideETFs Conference, State Street Global Advisors’ global head of ETFs, Jim Ross, identified the retirement space as a prime target of future growth.

AdvisorOne asked David Mazza, State Street’s head of ETF investment strategy for the Americas, why penetration of the retirement sector has been so low. Part of the reason, he said, was the shared history of 401(k) plans and mutual funds.

“As mutual funds were gaining in popularity, so were 401(k)s,” Mazza said in an interview on Tuesday at the conference in Hollywood, Fla.

Mazza also identified technological barriers, particularly those involving intraday trading, as only now being overcome.

“Here, 20 years into the ETF industry, the ability of 401(k) participants or providers to participate in ETFs is only coming on line now.

“Some smaller firms have built 401(k) ETF platforms. The larger firms are all looking at it, and they all have a timetable to do it.”

A traditional third barrier, aside from the comfort brokerages and plan sponsors have with mutual funds and technical issues concerning intraday trading, was the fact that ETF buying and selling involved a commission.

The introduction by Charles Schwab of a commission-free ETF platform may imply that that barrier is on the way out the door.

In an interview with AdvisorOne ahead of the InsideETFs conference, Schwab’s head of third-party ETF platform management, Beth Flynn, said an all-ETF 401(k) solution is expected to be rolled out at the end of the year.

“People have been trying to crack that nut for some time,” Flynn said, citing the challenges of fractional shares and, as Mazza indicated, “the fact that you don’t trade at NAV at the end of the day and awareness challenges in that that part of the industry has been so into mutual funds.”

State Street’s Mazza says that the provision of a platform “top-down” by a brokerage firm like Schwab will be further enhanced by a “bottom up” demand from retail investors for the superior investment vehicles that ETFs represent.

“[Retirement plan] particpants are asking for them,” Mazza said.

“What we have seen with ETFs is they are very precise tools. ETFs can offer more precise exposure in many markets, particularly fixed income. As the ETF industry has grown, the multitude of products allow 401(k) providers and sponsors to meet the precise needs of investors,” he said.


Check out AdvisorOne’s InsideETFs 2013 enhanced landing page for complete conference coverage.