ETFs (Finally) Break Into 401(k)s

FOR YEARS, investors have grumbled that there aren’t enough investment choices in their 401(k) plans—and grew even more disgruntled after losing a good chunk of their retirement funds in the crash. So you’d think getting access to one of the hottest investment products of the past few years would be good news. Too bad it’s more a case of being careful what you wish for.

ETF firms have long been eyeing the $2.3 trillion 401(k) jackpot. But until recently, companies that offered 401(k) retirement plans weren’t inclined to include exchange-traded funds. ETFs are baskets of stocks or other securities that trade as a single unit, a structure that can quickly become a record-keeping nightmare for firms that run the plans. That may be about to change, though: Those so-called plan administrators have recently found ways to overcome the record-keeping and trading issues that have hampered ETFs in the past. Already, Barclays, one of the biggest players in the game, has launched a new program to help financial advisers get its iShares ETFs into 401(k) accounts.

The tactic? Aim for 401(k) plans that want more cost-efficient options. Meanwhile, State Street Global Advisors, seller of the famous “spider” ETFs, is trying to get its foot in the corporate suite by offering retirement-oriented “target date” ETFs. Target-date funds have already achieved special status in many plans, despite their poor performance in the crash, and State Street aims “to play a part in the future,” says Anthony Rochte, senior managing director at State Street Global Advisors.

But the introduction of ETFs into 401(k) plans could be a mixed blessing. Typically, ETFs are cheaper than comparable mutual funds, but employees of large companies aren’t likely to see lower fees—big firms already can get rock-bottom fees on most funds, says Pamela Hess, director of retirement research at Hewitt Associates. Plus, the tax advantages of ETFs are minimized when held in a tax-deferred account like a 401(k). ETFs could still have broad appeal for small and midsize firms looking for lower-cost investments to include in their 401(k) plans. Nevertheless, says Rick Meigs, president of 401khelpcenter.com, “there’s no groundswell of demand” for ETFs by 401(k) plan sponsors.