PANC 2011: Finally Time for ETFs?

Exchange-traded funds are not ready for 401(k)s yet.

That was the contention of Larry Steinberg, President, The Steinberg Financial Group, before attendees of the PLANADVISER National Conference. He said this is because too many issues haven’t been worked out yet. He’d rather see big players in the industry hash out the bugs first, he said.  

Steven Dimitriou, Managing Partner, Mayflower Advisors, noted that many advantages of ETFs in the retail space won’t carry over for retirement plans.  For example, on the retail side, investors can make trades intra-day like stocks and they don’t have to wait for the end of day price: however, in 401(k) plans, the recordkeeper often makes the day’s trades in batches, losing the pricing advantage.  

While ETFs are touted as lower-cost investments, Dimitriou noted that since they trade like stocks there may be transaction fees. In addition, retail investors can control the tax treatment of ETFs, but that goes away in the retirement plan space.  

Just because they shouldn’t be mainstream doesn’t mean plan sponsors can’t find ways to use ETFs, panelists said. William Beale, Director, Henderson Brothers Retirement Plan Services, said that what’s probably coming is the use of ETFs as specialty investments.  

Stephen DesRochers, VP-Investments Advisory & Brokerage Services, UBS Financial Services, Inc., who moderated the PLANADVISER National Conference panel, added that sponsors can offer a brokerage window in which participants can choose ETFs. Collective trusts can also use ETFs.  

Dimitriou claimed fee disclosure will drive the growth of ETF use in retirement plans. However, custodial fees, advisory costs, recordkeeping administration costs, as well as transaction costs should be considered when comparing ETF fees to that of other investments, he said.