Arthur: Saving 401(k)s With ETFs

December 10, 2013

There are some who argue that “target-date funds” are an ideal solution that already provides a viable alternative. While a step in the right direction, the lack of transparency in the world of target-date funds is a critical flaw.

Let’s remember that in 2008, the average target-date 2010 fund designed for participants two years from retirement was down an average of 24 percent.

Clearly, several people were asleep at the wheel. However, with little transparency as to the underlying holdings, how is a plan participant to know?

The ETF Managed Solution

By contrast, consider an age-based, ETF-managed solution with four portfolios for plan participants with differing risk parameters.

The age-based solution may be designed to have greater volatility—and higher return potential—for younger participants and less for those at, or approaching, retirement.

Portfolio allocations would be determined by an experienced asset management team with extensive ETF experience.

Most notably, plan participants would be able to view the underlying ETF allocations on a daily basis. They may not be managing the assets, but they would have a clear idea of what’s being done, unlike in target-date funds.

How might the cost of this type of managed ETF option stack up?

The expense ratio for mutual funds in retirement plans with under $10 million in total assets typically averages around 1 percent, or $100 for each $10,000 invested.

Many plan participants fail to appreciate that they’re paying a full percentage point of their invested assets for a portfolio that they have to manage themselves. Moreover, many don’t really have a clue that, as the Dalbar numbers suggest, they have done a very poor job of doing so.

By contrast, a competent ETF asset manager can compile four well-thought-out age-based portfolios, diversified across an array of asset classes, at a blended cost of about 0.30 percent. That manager might opt to charge a management fee in the range of 0.50 percent.

Together, the all-in cost would amount to 80 basis points, or $80 for each $10,000 invested.

As a result, for the same cost or at less cost than a “do it yourself” plan, a professionally managed ETF solution, with complete transparency, is a compelling alternative.

Early, Early Innings

As we noted above, although the retirement landscape is still dominated by bloated mutual fund plans, ETF managed solutions are already an actionable idea that’s beginning to establish a foothold. (Full disclosure: Main Management LLC offers ETF managed solutions to its retirement clients for both 401(k) and 403(b) plans).

Custodians such as Mid-Atlantic Trust, TD Ameritrade Trust and Matrix have solved the fractional share issue associated with mutual funds and are the go-to players for third-party administrators (TPA)/record keepers looking to offer a more innovative option to their clients.

There is a long list of TPA record keepers, from the likes of national players like Ascensus and Professional Capital Services, to regional firms such as Primark in Northern California, that use custodians such as the ones we named above for managed ETF plans.

For a bit of perspective, ETFs in 401(k) plans are a little bit like the ETF industry 10 years ago—very small, but growing at a rapid clip because the value proposition is quite compelling.

The smart money is already in motion.

A managed ETF solution provides plan participants with considerably better odds of a successful retirement outcome than a self-directed option.

Surely it makes sense for business owners and benefit plan administrators—who are fiduciaries obligated to act in the best interest of plan participants—to closely evaluate an ETF managed option.

So far, too few of them have done so, despite the glaring shortcomings of the status quo. We think that’s likely to change in the coming years.

A pioneer in managing all-ETF portfolios, Main Management, LLC is committed to delivering transparent, cost-efficient, and customized investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency.


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