ETFs in 401(k)s? It’s a question that’s receiving a lot of attention of late, and specifically how—if at all—exchange traded funds would be used in retirement plans.
Using ETFs as a diversifier in collective investment trusts appears to be the answer, one of which Beaumont Capital Management is taking advantage.
The Boston-based quant ETF firm announced in late January that it has launched new retirement-planning “risk-managed target date Collective Investment Funds (CIFs).”
According to the company, the BCM retirement products “address the need for a more versatile investment solution that seeks to benefit in growing markets and can react appropriately and decisively in periods of market volatility.”
“The collective investment trust is the holding vehicle,” explains Dave Haviland, managing partner and portfolio manager of Beaumont Capital Management. “It contains seven Collective Investment Funds, five of which are target date funds and two are stand-alone growth strategies.”
Haviland adds that BCM investors can own ETFs in 401(k) plans in addition to owning Collective Investment Funds.
“I do believe ETFs have a place in 401(k)s because they are transparent, have a low-cost and trade intraday,” he argues.
When challenged about those ETF benefits and whether or not they apply to 401(k) plan participants, Havilland agrees they might not apply to the individual plan participant, “but they do to the 401(k) manager. It’s a more cost-effective tool for them to use both within and outside the 401(k).”
“They also might want to make a move and not wait until the end of the day. And the transparency aspect means they can see what’s in the fund immediately, rather than having to wait every 60 or 90 days for a report as they do with mutual funds.”
After noting a number of other firms have entered the ETF 401(k) space, Haviland claims the following five points set BCM apart:
1). They are one of the lowest-cost active managers in the target date space, which Haviland says is in keeping with recent action from the Department of Labor, and can further protect 401(k) plan sponsors and advisors from sanction and/or litigation.
2). Traditional glide paths do not prevent against large losses, but dynamic management does. “Look what happened to 2010 target date funds in 2008. They lost something like 20 percent or 25 percent.”
3). Too many TDF managers seem to forget – or never realize – that bonds have bear markets too. “We have [tactical allocations to both] stocks and bonds within our portfolio to guard against downturns in either.”
4). BCM funds are designed to meet participant needs, not those of the fund complexes.
5). The fifth point is one to which he previously referred, which is the transparency and flexibility inherent in ETF products.
“Can you handle a sixth point?” Haviland enthusiastically concluded. “We manage our TDFs for a long time horizon. We set our allocations and manage to those allocations for 10 years, but we can still be tactical enough to be defensive.”
The risk-managed target date CIFs offered are the BCM DynamicBelay 2060 QDIA through the year 2020, in 10-year intervals. These age-based portfolios are designed “to meet the varied needs across a workforce from aging Baby Boomers on the verge of retirement to Millennials just starting their first job.”
According to BCM, the portfolios mirror the design of a target-date fund, but the overall strategic allocations are adjusted over longer periods the way most investment advisors would manage a portfolio, rather than small annual adjustments. Additionally, BCM launched their U.S. Sector Rotation and Decathlon Growth Tactics strategies as collective investment funds, “which can easily be included and accessed in virtually any retirement plan.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
