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Top 10 Reasons 401k Plan Sponsors Fear ETFs Not Ready For Primetime

November 01
23:50 2010

Last week at the Westin Hotel in New York City, The Art of Indexing Summit 2010 presented a series of talks and panels primarily focusing on the evolution of the ETF industry. Dr. Seddik Meziani, Professor of Finance and Economics, Montclair Art_of_Indexing_2010_300University, chaired the Summit. Dr. Meziani posed an interesting question to the 100+ attendees when he said, “People have been saying ETFs will be the leader of the index industry. But ETFs are still only a fraction of the mutual fund market because they haven’t cracked the retirement plan market. Can ETFs crack that market?”

The ETF industry has been trying to break into the 401k market for several years with comparably less success compared to the growth in ETFs as a whole. ERISA plan sponsors and the 401k fiduciary will certainly benefit from discovering how those closest to this popular product feel regarding the issues surrounding adding ETFs to 401k plans. In the end, with even insiders questioning their appropriateness, it’s easy to understand why 401k plan sponsors continue to feel uncomfortable with ETFs.

Here’s a summary of the 10 top reasons why 401k plan sponsors fear ETFs are not ready for primetime when it comes to including them in their plans:

  1. Vinny Catalano, President and Global Investment Strategist, Blue Marble Research, pointed out professionals use ETFs to fill in a sector in a portfolio. He said retail investors like those who invest their 401k plan don’t do this – they chase performance.
  2. Alan Rosenfield, Managing Director, Harmony Asset Management, feels with Wall Street, things are typically made to be sold, so we need to expect that at some point ETFs will be oversold.
  3. Russell Wild MBA, Investment Advisor, Global Portfolios, believes ETFs are a wonderful product but make it too easy to trade. This, in turn, makes it easy for 401k plan participants to enter bubbles.
  4. Wild adds it’s also easy to get eaten alive by little charges – particularly true for smaller investors (under $100K) – as even “free” ETFs have spread problems.
  5. Paul Weisbruch, Vice President ETF/Index Sales and Trading, Street One Financial says it’s very important for the fiduciary to know how ETF orders are being executed. There’s a lot of potential danger and a lot of counter trading that could take advantage of the average 401k investor who doesn’t have the time or knowledge to keep track of such things.
  6. Catalano feels the issue of ETFs in 401k plans is more an administration question than an investment question. Because ETFs are treated as an individual stock, by adding ETFS, the plan fiduciary risks opening the door to all individual stocks.
  7. Rick Adkins, Chief Executive Officer, The Arkansas Financial Group warns the 401k plan participant can’t easily evaluate ETFs like they can with mutual funds.
  8. Kenneth Dolan, Senior Trader, LaBranche Structured Products said institutional traders should never enter a market trade for ETFs. Yet, will the 401k plan sponsor allow the plan participant to set limit orders?
  9. Thomas Heck, Chief Investment Officer, Ball State University Foundation says a 401k plan sponsor can already get index-based mutual funds, so why bother with ETFs, which are essentially index products.
  10. Rosenfield wonders whether 401k plan participants are properly educated in how to trade in ETFs.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Chuck Epstein
    Chuck Epstein November 02, 23:00

    ETFs are overdue for a larger role in 401(k)s, but since they do not engage in revenue sharing with the plan sponsor, plus they have lower expenses, they do not get top shelf space. A lower expense product would create a new expense benchmark against mutual funds. ETFs also have the elements to make a better target-date fund product, and if packaged correctly, should garner a much larger market share in the 401(k) space.

  2. Jan Sackley, CFE
    Jan Sackley, CFE November 03, 10:19

    I simply want to thank you for promoting discussion of the ETF topic and the related implications for sponsors and participants, and also for individual investors. I believe we will see a changing tide with respect to how service providers are paid, leading to a renewed overhaul of investment choices that may or may not include ETFs.

    Jan Sackley, CFE
    Fiduciary Foresight, LLC

  3. Darwin Abrahamson
    Darwin Abrahamson November 05, 18:34

    10 top reasons why 401k plan sponsors fear ETFs is incorrect the titled the tile should read 10 top reasons why advisors fear ETFs.

    Paul Wiesbruch is correct if ETFs are offered it is “very important for the fiduciary to know how ETF orders are being executed. “ Catalano is incorrect mutual funds have more of a fiduciary problem than ETF because of high management fees, revenue sharing, 12(b)(1) fees, internal trading cost and multiple share classes.To answer Mr. Heck statement “why bother with ETFs,” the answer is that index mutual funds have higher fees than ETFs based on the same index and the ETFs do not have internal trading cost like index funds.
    The average cost for the ETFs in the NSRP 401(k) Plan which I am the plan sponsor of is 18bps.

    Participants in 401(k) plans are not going to have any different investment behavior whether their plan has EFTs or mutual funds. Participants have zero chance of being educated on investment education. The 401(k) fiduciaries should not maintain the responsibility or liability of selecting investment options when they can hire an ERISA §3(38) investment manager.  A 3(38) investment manager is a prudent expert that has full fiduciary discretion to select the investment options and design and manage model portfolios for the participants. This also removes the participants from the investment process which they will never be experts at. I hired a 3(38) for the NSRP 401(k)Plan.

    Darwin Abrahamson, CEO
    Invest n Retire, LLC

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author November 05, 22:05

    Chuck, Jan & Darwin, thanks for the comments.

    Chuck, good point about the revenue sharing. I think that could classified under an administration issue. However, the direction the DOL is heading might put a crimp in existing revenue sharing arrangements. This is what I think Jan is referring to.

    Darwin, since, as you say, 401k plan sponsors hire third parties for investment services, so they will likely get their information from those service providers. This information, in turn, can instill fear or confidence. Also, just for the record, Mr. Heck is not a service provider but a corporate fiduciary in charge of his school’s portfolio.

    I like the comments! Keep them coming!

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