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What's next for ETFs and the 401(k) business?

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There’s lots of talk about the growth of assets in ETFs outpacing that of other financial products. While that storyline is mostly true, ETFs have low penetration in the multi-trillion retirement plan marketplace, where they’re a virtual no-show.

Earlier this month, Blackrock’s iShares unit said it would close 18 ETFs in mid-October.

Most of these funds had made little traction with investors, judging from their lack of assets.

But here’s where things get really interesting: Of the ETFs being closed, nine iShares are target date or retirement-geared funds which have target dates from 2010 to 2050.

Did Blackrock’s iShares just bail on the 401(k) market? Love them or hate them, target-date retirement funds have been immensely popular within the 401(k) market.

A key reason for this is their designation as “qualified default investment alternatives” by the Department of Labor (DOL). Coupled with automatic enrollment into retirement plans, this situation has been a boon for these types of retirement funds.

The DOL estimates that investors should contribute between $70 billion and $134 billion in additional retirement savings by 2034.

Despite the DOL’s mouth-watering retirement savings projections, it appears that ETF providers – as gauged by their behavior – want no part of that growth.

Actions speak louder than words and right now the actions of major U.S. ETF providers very clearly say “We aren’t serious about serving the 401(k) market.” What else explains the sudden closure of target-date ETFs?

Actually, there are some additional factors to consider, experts say.

“The closure of the iShares target date ETFs for lack of assets is very simple. It’s a lack of technology to record keep and trade ETFs in legacy recordkeeping systems,” said Darwin Abramson, the CEO of Invest n Retire.  Abrahamson’s Portland, Ore.-based firm provides record keeping and trading systems for defined contribution (DC) plans, which includes the technology necessary to automatically trade ETFs.

Of course, other ETF providers may decide to step-up to the plate and make a bold move or two in this business. The $5 trillion 401(k) market is screaming for greater transparency and lower fees.

Blackrock’s liquidation of its target-date ETFs opens the door wide open to firms like Charles Schwab, WisdomTree and other firms interested in actively pursuing the strategy of including ETFs in 401(k) plans. Hopefully, they will be more committed than Blackrock. 


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