It’s a question that’s getting attention of late, but the answer is always the same; is there a place for exchange traded funds in 401(k) plans?
“Not as a stand-alone product,” Todd Cassler, president of institutional distribution with John Hancock Investments, bluntly stated at TD Ameritrade Institutional’s National LINC conference in Orlando on Thursday.
However, they do have a place in the 401(k) space as a tool in an asset allocation solution, Cassler added, specifically in managed accounts and target date funds.
“You’ll also occasionally see it wrapped into collective investment trusts and other packaged asset allocation solutions, but as a stand-alone investment option it’s very rare,” he reiterated. “The benefits of ETFs are limited in a 401(k) plan. For instance intraday trading and tax efficiency, key aspects of ETFs, have little relevance in a retirement plan.”
Noting that 401(k) plan participants can get the same exposure by using an indexed mutual fund, Cassler explained that the record-keepering systems employed by 401(k)s were originally built for mutual funds and collective investment trusts, not for exchange traded funds.
Will it change eventually?
“There will always be change in the industry, and you’ll see their use grow with the corresponding use of managed accounts,” he said. “Also, if there is a shift from ‘to’ to ‘through’ strategies to help participants achieve their retirement income needs, ETFs could be one of the asset allocation tools used to help get them ‘through’ retirement.”
When building target date and target risk funds, Cassler added that John Hancock is very conscious about costs and always looking to develop better portfolios. ETFs are solutions that are considered in the portfolio construction.
As for John Hancock’s product lineup overall, Cassler mentioned the recent ETF products launched with famed passive investing outfit Dimensional Fund Advisors, as well as liquid alternative investment products John Hancock Investments offers.
Asked about the recent market cooling for liquid alternatives, he shrugged it off, noting that “investors continue to look for non-correlated sources of return.”
Cassler concluded by noting the investment products that are coming just over the horizon.
“Environmental, social and governance, or so-called ESG products that allow for sustainable investing will be significant, but there’s still a question on how the investment philosophy is defined in mutual funds and ETFs. It’s all related to demographics. Millennials, in particular, are focused on doing good for society, and they want that reflected in the investment choices they make.”