Slowly But Surely, ETFs Are Easing Into 401(k) Plans

Includes: BLK, WETF
by: Tom Lydon

Hear that? There’s a revolution taking place in the ETF industry, and dominance of the $2.7 trillion 401(k) market is at stake. ETFs have long sought to be staples in 401(k) plans, and the industry is ready to take on the final front in the battle for assets. Who’s on the front lines?

BlackRock (NYSE:BLK) is going after retirement plans with $50 million or less which have stayed relatively under the radar of larger retirement fund providers. Amy Feldman and Sree Vidya Bhaktavatsalam for Bloomberg BusinessWeek report that the company wants a larger slice of the $2.7 trillion 401(k) retirement market, and it’s using its position as the world’s biggest manager of ETFs to win over small companies.

Will the strategy also help ETFS gain more of the retirement market share? iShares which is BlackRocks’ ETF family, is such a large fund family that many consider it to be the bellwether of the industry’s direction. Many feel that the induction of ETFs into the retirement industry is inevitable.

The ShareBuilder plan itself is awesome, too. You can choose to manage your own holdings by picking from a list of ETFs they have available, or you can utilize one of their all-ETF model portfolios. You can easily keep track of how your account is doing online.

iShares estimates that its ETFs used in 401(k) plans and other retirement accounts could top $100 billion over the next 10 years.

ShareBuilder 401k is a great option for small- to mid-sized 401(k) plans. We recently switch our 401(k) plan to ShareBuilder 401k, which offers and we’ve been impressed with the level of service offered so far. ING’s ShareBuilder 401k works with small companies to give them a low-cost retirement plan that utilizes only ETFs.

Our previous 401(k) provider only utilized mutual funds. We’re big fans of ETFs over here – we use them for our clients and we write about them all day. It only made sense to use them for our employees, as well. That’s what led us to seek out ShareBuilder.

Setting up our account and transferring our 401(k)s over to the ShareBuilder platform was ridiculously easy and everyone we spoke to every step of the way was incredibly helpful. After discussing our business with us and what we were looking for, our rep sent over a page detailing the mutual funds in our current plan, the fees we were paying and how much we could save over five years. Here’s a hint: employer and employee combined savings number in the thousands.

After you fill out your paperwork, there are reps to help you every step of the way, including reps from PAI, the plan’s administrator. It was all so easy, in fact, that the hardest part was gathering our old 401(k) account information and sending it over to ING.

ShareBuilder and BlackRock aren’t the only businesses working to make ETFs a staple in 401(k) plans. Vanguard uses index mutual funds in its own 401(k)s; perhaps ETFs won’t be far off. WisdomTree (WSDT.PK) created a business unit in 2007 that delivers 52 ETFs to the 401(k) marketplace. A number of small businesses, such as Invest n’ Retire, have been the early adopters of ETFs in retirement plans, but once larger companies and corporations join in, the growth may really take off.

Many of the larger providers have shut down the idea of using ETFs on a 401(k) platform. The argument is that ETFs are not suitable for long term retirement savings. On the contrary, lower fees could mean the difference between an okay retirement and a very nice one over the long term.

The rush to get ETFs into more 401(k) plans is increasingly important. Assets in such plans are estimated to grow 41% by the end of 2014, to $3.7 trillion in assets. ETFs currently account for between $5 billion and $10 billion of 401(k) assets.