A Solution for Including More ETFs in DC Plans

ETFs are inexpensive, have no sales or service fees, and no surrender penalties, so, considering the DOL conflict of interest regulations, it would seem they would become popular, suggests Bob Ward with Vertical Management Systems.

Vertical Management Systems cites Investment Company Institute research that found exchange-traded funds (ETFs) “accounted for 13% of total net assets managed by long-term mutual funds, ETFs, closed-end funds, and unit investment trusts, at the end of 2014.”

So, it asks, “If ETFs have managed to garner 13% of the market for pooled fund-type investments, why has there been almost no ETF penetration of the defined contribution (DC) marketplace, which is entirely dominated by pooled funds?”

Bob Ward, chief revenue officer for Vertical Management Systems, headquartered in Pasadena, California, tells PLANSPONSOR, “To start with, from an attribute standpoint, ETFs make all the sense in the world, especially with [Department of Labor] DOL [conflict of interest] ruling. They are inexpensive, have no sales or service fees, and no surrender penalties, so, considering the regulations, it would seem these would become popular.”

The issue is with how they are handled on recordkeeping platforms, according to Ward. He explains that mutual funds trade once per day and are pooled along with other investors’ trades. ETFs can be traded intraday, and have more liquidity. “In order for folks to adapt to ETFs now, they have to trade after market or with some kind of roll up activity, which drives up costs and takes away the benefit of ETFs.”

Ward adds that most recordkeeping platforms were created in the mid-1990s and have no ability to handle real-time trading to provide the benefits of ETFs. “We decided that core securities processing is best run on a brokerage system,” he says.

Vertical Management Systems’ Retirement Revolution recordkeeping platform was designed as a brokerage application in which individuals have their own accounts there is the ability to recognize cash, so it frees up the ability for ETFs to be traded real time, Ward explains. Layered on top of that is a trust accounting system that provides the ability to roll up omnibus information. And Vertical Management Systems added recordkeeping functionality. “It’s a new model for the retirement world,” Ward says.

“Mutual funds always have a place, but DC plans need to have access to ETFs and the ability to maximize the benefits of ETFs, he concludes.

More information about Vertical Management Systems is at http://www.vmsholdings.com/.