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ETFs: An Easier Way to Roll Into Retirement, Experts Say

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Baby boomers, take heart: investing for and going into retirement has gotten easier—and mostly cheaper—in part due to ETFs and technology.

This was one theme retirement fund experts voiced during a panel at the Morningstar ETF Conference in Chicago.

Scott Kubie, chief investment strategist with CLS, which has $7 billion in assets—mostly in 529 plans and 401k funds—pointed out no matter what people say they are saving for, “everyone is investing for retirement.”

Will McGough, vice president of portfolio management of Stadion, which has managed retirement plans since the 1990s, said his firm launched a new plan called StoryLine, which is “robo-like” by allowing investors to choose from “glide paths” on screen to tighten their risk profile.

Bob Smith, co-founder, president and CIO of Sage, which has $12 billion AUM, said he certainly believes ETFs have a role in retirement planning, for example in cash balancing, one of the fastest growing areas.

Morningstar’s Christine Benz moderated the session, asking whether cost was the rationale for ETFs in retirement planning when index funds might accomplish the same.

Kubie answered that when CLS does its risk budgeting on a portfolio, “ETFs tend to have strong history; a steady methodology, even if it’s a quantitative or a smart beta strategy, that gives us a greater degree of confidence on how much risk we’re taking on in the positions.”

He said CLS liked ETFs too because of the democratization they brought to the market. “ETFs are the best place to get access to a very wide number of asset classes that weren’t available before…having these tools makes ETFs more attractive [and makes] managing the risk more precise.”

Smith agreed: “It levels the playing field, unequivocally. It gives [participants] access to market areas they’ve never had before, such as commodities, real estate, etc., but you must be able to scale. What I can do for a $50 million institutional client, I must be able to do with a $50,000 client. That’s the beauty of ETFs: I can scale that.”

McGough cautioned that the 401K industry is “riddled with old technology,” which makes it difficult to implement ETFs into the selection matrix for the participant. He also said plan sponsor infrastructure is too burdened with fiduciary and system issues to introduce, say, 200 ETFs. Asset managers would find them of better use because participants might find them “too vanilla.”

What about target date programs? Benz asked.

Kubie noted that target date plans were best for the 20-30 year olds—those just starting out—than those in the 50+ area because “target date funds are uniform; they treat everyone the same….”

Smith added that target date funds mean lots of administrative work and record keeping, and have an expense structure that brings the rest of the market down. “There are lots of reasons they are successful, but they are like the dinosaur on the way to the tar pits.

“Target date funds as we know today will not be the same in 10 years. Why? Because customization is being demanded.”

Smith also warned that picking a fund because it’s “cheap” is “indefensible. It’s not a rationale anymore that’s accepted by ERISA. Cheapest doesn’t mean best.”

That said, cost factor still is key, and all advisors saw technology as the gateway to achieve lower costs.

“Learn to live lean,” Smith stated, noting, “Zero costs on strategic models is a race to destruction.” For investors, technology has certainly changed the business and reduced costs so “people can get customized [plans] for a very compressed price point.” He said it works for the “rollover guy” who can’t afford more, and for millennials “who don’t know any other way.”

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