The low-fee fund movement is unquestionably driving exchange-traded fund adoption, but when (if ever) will it hit 401ks?
U.S.-listed ETFs surpassed the $3 trillion asset mark for the first time in July, growing 2.8 percent for the month.
It’s still something of the fly on the elephant, with mutual fund assets growing 1.5 percent to nearly $13.9 trillion in assets, and net flows into mutual funds ($18.7 billion) were positive in July. However, as Boston-based Cerulli Associates notes, these numbers “continue to appear pedestrian when compared to net flows moving into ETFs ($29.6 billion).”
While the low-cost, transparent, tax-efficient and flexible advantages ETFs offer make them increasingly popular with investors across generations, those benefits don’t necessarily translate to long-term, buy and hold retirement planning (save the first).
Additionally, Brad Kuhlin, co-founder and chief software architect for Vertical Management Systems, points to technology issues with record keepers as a major cause for a lack of ETF of interest.
“The reason for this lack of traction is that the vast majority of the $6 trillion in defined contribution assets in the U.S. are administered by 30-plus-year-old recordkeeping systems that are incapable of accounting for investments that may be traded more than once per day and only after market close,” according to Kuhlin. “This is hard to believe, especially in the year 2016, but it’s true.”
“With respect to the lack of ETFs in retirement plans, technology is holding us back,” he adds. “The old technology being used by the majority of recordkeeping systems effectively locks them into offering only NAV-based investments, typically mutual funds or Common Trust Funds.”
Legacy recordkeeping systems require that within a given investment CUSIP, all buys and sells for the day must be executed after hours, at the exact same price, across all participants transacting in that CUSIP.
“There are exceptions to the rule on some systems when it comes to trading and pricing company stock. In these cases, however, the solution is so ‘shoe-horned’ into the record keeper’s manual processes, there’s no way the process would scale effectively if all the investments on the system were managed the same way,” Kuhlin concludes.
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.
This article is very poorly researched.
As it stands today most Indexes in both CIT and Mutual fund form are as cheap if not cheaper than their ETF counterparts. This hold especially true in the large plan space. For example,Vanguard offers their SP 500 index for 1 basis point in Large Plan CIT’s. This is less than the Vanguard SP 500 ETF (VOO) with an expense ratio of 4 basis points.
There is no advantage to ETF’s in 401k plans, where they lack the associated trading costs or tax advantages and CIT’s are less expensive.
Perhaps you should not cherry pick data or do better research.