Abrahamson also comments that we "defend the practice of revenue sharing" in our paper. We don't defend the practice; we simply note the practical reality that revenue isn't going anywhere anytime soon. The most prudent investments through a sound fiduciary process should be selected for a plan, and if such an investment happens to pay revenue share, it should be collected and returned to the plan to reduce total plan costs. This is a common duty of any true fiduciary. Abrahamson clearly does not understand Unified Trust's business model and has made little, if any, attempt to do so.
Unified Trust's fiduciary approach in dealing with revenue-sharing issues has been carefully examined by auditors, banking regulators, the DOL and CEFEX (Centre for Fiduciary Excellence). As a discretionary ERISA fiduciary, Unified Trust prudently follows the DOL "Frost" Opinion Letter (DOL 97-15A). In the letter, the DOL sets out how an ERISA fiduciary should deal with revenue-sharing payments. The fiduciary's compensation should not vary because of any particular investment selection. Revenue-sharing funds are used to offset the fiduciary fees on a dollar-for-dollar basis. Any excess revenue above the fiduciary's fees is returned to the plan. This is the fiduciary approach Unified Trust has utilized ever since we received our first revenue-sharing payment.
Abrahamson's additional references to previous research by the authors and other Unified Trust employees are not pertinent to the underlying purpose of our research—to determine the potential benefits of ETFs in 401(k)s—and appear to be ad hominem or red herrings if little else. While he does note that his company has created a patent-pending technology for "trading and record-keeping ETFs in 401(k) plans," he provides no information on the total cost of these services or the general availability and acceptance of this approach. Without providing information on the costs of the services, or the resulting net performance actually earned by investors, Abrahamson cannot contend our argument is without merit, and that his ETF approach—or really any ETF approach for that matter—is better than a mutual fund approach.
We determined that "ETFs and 401(k)s will never match" because when all the costs are factored in, it just doesn't make sense to try to make an ETF 401(k)-ready when such a large number of low-cost, high-quality mutual funds already exist. If we had found that ETFs were a better investment option than low-cost, high-quality, passive mutual funds, that would have been the position taken in our paper; however, this was not the case. Our analysis was independent and our results should be viewed as such. We had no underlying agenda when writing our piece; we were merely trying to uncover the truth.
We recognize there may come a day when ETFs are a better solution than mutual funds for 401(k) plans, and if/when this day comes, we will gladly make the switch. Today, though, a plan sponsor desiring a passive approach is better served investing in low-cost, high-quality mutual funds than attempting to utilize an ETF approach. While there may be a few, if any, exceptions to the rule, mutual funds are clearly the rule, and ETFs are clearly the exception.
1 An interview with John Bogle in "Volume-weighted Trading Costs and Mutual Fund Performance," Roger M. Edelen, Echo Investment Advisors; Richard Evans, Boston College; and Gregory B. Kadlec, Pamplin College of Business, Virginia Tech, Nov. 16, 2006.
2 "An Analysis Of Mutual Fund Trading Costs," John M. R. Chalmers, University of Oregon; Roger M. Edelen, University of California, Davis - Graduate School of Management; Gregory B. Kadlec, Virginia Polytechnic Institute & State University - Pamplin College of Business, November 1999.
3 "Mutual Fund Brokerage Commissions," Jason Karceski, University of Florida; Miles Livingston, University of Florida; Edward S. O'Neal, Babcock Graduate School of Management - Wake Forest University, January 2004.
5 Unified Trust passes through 100 percent of all revenue-sharing payments received to the Plan, less a trading fee cost for fund trading and revenue collection, but cannot guarantee what amounts, if any, will be collected. The trading fee is a charge levied by Sungard STN and passed through to the plan by Unified Trust to offset trading and revenue collection costs.
6 "The Legality of Kickbacks: How 401(k) Vendors are Paid on the Eve of SEC and DOL Investigations," Pete Swisher, CFP, vice president and senior institutional consultant, Unified Trust Company, N.A.