RETIREMENT-PLAN RENAISSANCE MAN SKIP SCHWEISS wears multiple hats at TD Ameritrade Institutional. He’s managing director of advisor advocacy and industry affairs for the firm, and therefore steeped in the fiduciary issue, but also serves as head of TD Ameritrade Institutional’s retirement plan services.
The latter means he can certainly sound off authoritatively on the use of exchange-traded funds in 401(k) plans.
“The 401(k) industry and mutual funds industries grew up together,” Schweiss says, when asked about mutual fund use by plan participants to the exclusion of other products. “Yes, mutual funds have been around for about 90 years, but they didn’t experience real adoption until the 1980s, which is when 401(k)s came along. It wasn’t intentional; it’s just how it happened.”
Noting that “a lot of people” said the benefits of ETFs are not right for the 401(k) structure, advisors nevertheless started asking for them “a few years ago.”
“They can use them in brokerage accounts and managed portfolios, and they’re included on core menus,” he adds. “Our advisors will offer 10 or 20 ETFs on an investment menu, rather than comparable active or index mutual funds. Yes, there are settlement issues, timing differences and other technology and operational issues to overcome, but we roll up trades at end-of-day and bundle them for better pricing.”
Overall, he claims there is a 1 percent to 2 percent ETF adoption rate in 401(k)s industry-wide, so it’s still very low, which means “we don’t have an overriding goal to have ‘X’ percent of our business using ETFs in 401(k)s. Rather, we’re agnostic and simply service our clients.”
As for how they are used, Schweiss notes they complement, rather than compete with, their mutual funds counterparts.
“When a plan uses ETFs, they are not using them exclusively, but rather blending them with mutual funds. Vanguard is really the dominant player on our platform right now. We’re just really happy to meet the need for greater adoption and plan use.”
He concludes with sober thoughts surrounding the excitement of ETF asset growth.
“ETFs, combined, currently hold $1 trillion in assets while mutual funds hold $15 trillion in assets. So I’m a bit cautious about this idea that they’ll take over the world, but they are growing.”
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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.
