What the $1.65T Spending Bill Means for ETFs

December 23, 2022

As the exchange-traded fund industry seeks a larger role in U.S. retirement savings, a bill passed by Congress Friday shows there is still work to be done. 

Tucked into the massive $1.65 trillion spending bill is the Secure 2.0 Act, which is designed to get more Americans saving for their retirements. The larger spending bill is expected to be signed by President Biden Friday and avoids an end-of-year government shutdown. 

Secure 2.0 aims to “increase retirement savings, simplify and clarify retirement plan rules,” according to the bill’s language, and includes incentives like automatic enrollment in retirement plans, as well as measures that simplify the process and remove rules that may discourage saving. 

Experts said they see the bill providing a nudge to the ETF industry, which plays a small role in what Investment Company Institute research says, is $8.9 trillion held in employer-sponsored defined contribution plans. This is partly because exchange-traded funds were created with tax incentives that don’t matter in tax-deferred retirement accounts.  

“Any bill that increases awareness and ease of retirement funds will help ETFs,” said Josh Gotbaum, economic studies guest scholar at the Brookings Institute think tank in Washington D.C.  

“Secure 2.0 will help the ETF industry because it will increase funds in retirement savings accounts and—I think—those accounts, like other retail investing accounts, are increasingly taking advantage of ETFs,” he wrote in an email to ETF.com. 

The bill will likely give a bigger boost to mutual funds, which held $3.8 trillion, or 61% of assets in 401(k) plans as of the end of September, according to the ICI data. 

Aniket Ullal, CFRA Research’s head of data and analytics, said the Secure 2.0 act will boost the overall pool of assets flowing into retirement accounts, which will provide a “knock-on benefit” to ETFs. 

ETF issuers have been trying to increase their market share in retirement accounts, Ullal said. In addition to the tax benefits of ETFs not playing a role in tax-free retirement accounts, “structural reasons” also hold them back, such as the fact they require more record-keeping than mutual funds. 

Some deferred contribution providers 401(k) plans that are 100% invested in ETFs, Plan Adviser reported last year, while also noting that mutual funds have a legacy advantage over ETFs, since they were created decades earlier. 

“It’s good news for the overall fund industry, and probably has fewer implications for ETFs,” Ullal said. 

 

Contact Ron Day at [email protected]  

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