ETFs Breaking Into 401(K), 529 Savings Plans

by: Tom Lydon

Exchange traded funds have seen impressive growth over the past few years, with assets registering at around $1.2 trillion. Finally, the funds are trickling into segments of the institutional market such as 529 college savings plans and 401(k) retirement platforms.

"Historically, 529 plans have utilized mutual funds almost exclusively. But, not surprisingly that is changing as ETFs claim a bigger market share. A program from State Street Advisers allows new parents to use ETFs in a college savings plan for children, through an ETF-focused 529 plan," Michael Johnston for ETF Database wrote earlier this month.

Similar to other ETF offerings, the 529 plan is attractive to many investment advisers which allows them to create portfolios for clients, charge fees and remain cost-effective, reports John Waggoner for USA Today. The SSgA Upromise 529 plan, a new arrangement with the state of Nevada, offers three all-ETF options:

  • College-date portfolios, which are managed to be less risky as your child approaches college age.
  • Tailored risk management portfolios that range from aggressive to moderate and conservative.
  • Static portfolios, which allow you to create your own ETF portfolio.

There is one stipulation: there is no day trading within a 529 portfolio, however, investors can change their holdings once per year.

The movement into 401(k) retirement plans has occurred slowly for ETFs. These funds have yet to make it into corporate 401(k) plans, but an all-ETF 401(NYSE:K) plan will be available later this year from Charles Schwab. Annual fees for such a plan will be around 0.2%, but with third party advice an average of 0.65% can be expected.

"We're looking at driving costs down," Steve Anderson, senior VP at Schwab retirement services said.

As of right now, most 401(k) investors can buy ETFs if their plan has a brokerage option. Around 38% of plans have this option, but only about 2.4% of investors participate in the choice, Jeanne Thompson, vice president of retirement insights at Fidelity mentioned.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.