Led by the iShares exchange traded fund group, exchange traded funds are poised to break the stranglehold that mutual funds have on 401(k) retirement plans.
The San Francisco-based unit of
Barclays Global Investors launched the “iShares in 401(k)” program last month to help financial advisers use ETFs as investment options within 401(k) retirement plans.
The program identifies administrative providers and networks that offer access to ETFs in 401(k) accounts, making it easier for advisers to provide the funds in clients' retirement programs alongside traditional mutual funds.
The timing seems right.
The massive losses in 401(k) plans — losses that can be attributed to mutual funds that in many cases are more expensive than ETFs — work to the advantage of ETFs, said Darek Wojnar, head of product research and strategy at iShares.
And more 401(k) administrators and networks have cleared the technical hurdles of buying and selling ETFs and are making room for the products.
“The record keepers have figured out ETFs are coming and they need to accommodate them,” said Bruce Levine, president of ETF provider WisdomTree Investments of New York.
WisdomTree rolled out its own ETF 401(k) platform in 2007.
With assets of $25 million spread among 10 plans, Mr. Levine admitted that it has been “slow going.”
Industrywide, ETFs account for less than 5% of the assets in 401(k) plans, Mr. Wojnar said.
But iShares could change that through its new program and its deep relationship with advisers. It was the largest ETF provider at the end of March, with $232.8 billion in assets spread across 180 ETFs.
Before it even announced its 401(k) program, representatives from iShares had already reached out to Richard Romey, president of ETF Portfolio Solutions Inc., an Overland Park, Kan.-based advisory firm with $40 million in assets. During a conference call, the reps went over the services that the company will provide advisers who are looking to get into the 401(k) space, he said.
“I found it very useful,” Mr. Romey said.
During the past six months, individual clients who also own companies have asked about including ETFs in their company-sponsored 401(k) plans, he said.
As a result, he is looking to get into the 401(k) advisory business.
Other advisers and industry experts, however, said that they are skeptical about the ability of iShares or any other company to shoehorn ETFs into 401(k) plans.
“It's kind of like being in the wrong political party,” said Jim Lowell, the Needham, Mass.-based editor of Forbes ETF Advisor, a monthly newsletter. “Mutual funds hold all the power and all the votes.”
And that hasn't really changed.
“We continue to explore this area as a place where we see opportunity for growth,” but there are still “operational challenges” to having ETFs in 401(k) plans, said James Ross, senior managing director at
State Street Global Advisors of Boston.
SSgA is the second-largest ETF provider by assets, with $129.4 billion in assets spread across 83 ETFs at the end of March.
“They may offer great value to small- and mid-level plans, but a lot of larger plans have access to options that are cheaper,” Mr. Ross said.
The Vanguard Group Inc. of Malvern, Pa., the third-largest ETF provider by assets, with $44.2 billion in assets spread across 38 ETFs at the end of March, doesn't include its own ETFs in its 401(k) plans be-cause its index funds are cheaper options, said Rebecca Cohen, a spokeswoman for Vanguard.
Vanguard, however, does make them available to companies such as Invest n Retire LLC, a Portland, Ore.-based record keeper that provides ETFs to 401(k) plans, she said.
Of course, iShares isn't targeting large plans but micro-, small and midsize 401(k) plans controlled by financial advisers.
The iShares unit has identified Plan Administrator Inc. in De Pere, Wis., and Ascensus Inc. in Dresher, Pa., as its first “preferred providers.” Mid Atlantic Financial Platforms Inc. in Pittsburgh is the first “preferred network.”
Preferred providers are administrators who offer fully bundled ETF 401(k) solutions to advisers.
Preferred networks are custodians or technology providers that enable all the administrators on their network to offer ETF 401(k) plans.
The company plans to add providers and networks in the future, Mr. Wojnar said.
Even so, iShares will have a tough time getting ETFs into 401(k) plans, said David Wray, president of the Profit Sharing/401k Council of America, a national non-profit association based in Chicago.
“The fundamental issue is a practical one,” he said. “Are the majority of systems set up to do ETF record keeping?”
The answer is still no, Mr. Wray said.
The only way for iShares to make a real move into the 401(k) arena is to get into the record-keeping business itself, but iShares is reluctant to do that, industry experts said.
“I'm glad that everyone realizes ETFs should be in 401(k)s,” said Darwin Abrahamson, chief executive of Invest n Retire LLC of Portland, Ore. “My biggest concern is, all these companies are doing this incorrectly.”
The iShares 401(k) program seems headed down a particularly troubling path that resembles a previous effort to break into the 401(k) market, Mr. Abrahamson said.
In 2007, iShares announced a partnership with what is now NextStep Defined Contribution Inc., a San Ramon, Calif.-based 401(k) provider, that bore little fruit in its effort to create a platform that would make ETFS available to 401(k) plans, Mr. Abrahamson said.
Officials at iShares see it differently.
“We still do work with them,” Christine Hudako, a spokeswoman for iShares, said of NextStep.
But iShares has come to realize that it needs to work with multiple partners to serve the needs of advisers interested in breaking into the 401(k) space, she said.
E-mail David Hoffman at [email protected].
