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ETFs might find room for growth in 401(k) plans

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They’re barely a blip on the radar screen in 401(k)s, but exchange-traded funds are looking to expand their presence in the retirement market.

According to a Cerulli report, more ETF sponsors are focusing their distribution eorts on small- and midsized dened contribution (DC) plans (those with assets less than $250 million).

Currently, ETFs constitute less than half of one percent of the investment vehicles in use in 401(k) plans, but both record keeper Schwab and robo-advisor Betterment have recently rolled out managed account options with ETFs for 401(k).

According to the Cerulli report, “Historically, ETFs were not used in 401(k) plans because of the reasons for which ETFs are typically appealing—intra-day trading, tax advantages, and low costs—are either irrelevant or questionable when considered in a DC context.”

That’s still true, particularly for large plans, which often find institutional share classes of mutual funds are an even better bargain for participants than ETFs.

As a result, ETFs represent just 0.02 percent of the offerings in 401(k)s.

But ETF sponsors aren’t giving up; instead, they’re turning to smaller plans for a very good reason.

Robo-advisors are pointing out that they can be cost-effective for employers, particularly in the microplan arena, and robos are choosing ETFs in a market in which microplans “are underserved because they tend to not be profitable for advisors and providers,” according to the report.

Still, Cerulli has doubts about how quickly, or how much, the ETF presence may grow within retirement plans.

“Cerulli feels the amount of media attention recently paid to ETFs in the context of the 401(k) space is outsized with respect to their marketshare and potential use,” the report said, adding that robo-advisors’ efforts to utilize ETFs, especially in micro plans, could result in a greater presence of ETFs within DC plans “in the foreseeable future,” although “any meaningful impact is still a ways off.”

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