Now that Schwab has put ETFs into 401(k)s, it’s time to write the mutual fund’s obituary, Ric Edelman says.
Schwab’s long-awaited plan to integrate ETFs into its 401(k) platform is truly here, and the worlds of both 401(k)s and mutual funds will never be the same, Ric Edelman, founder and chief executive officer of Edelman Financial, told ETF.com in a recent interview.
Edelman, whose firm manages $12 billion for a largely retail clientele, began to abandon open-end mutual funds in favor of ETFs in the wake of the mutual fund market-timing scandal a decade ago. In other words, you’d be hard-pressed to find a bigger of fan of ETFs than Ric Edelman, who reckons Schwab’s new ETF-based 401(k) will speed the demise of mutual funds.
ETF.com: What's the most exciting thing that's going on in the ETF space you’ve seen in recent months, if not years?
Ric Edelman: Without question, the most exciting development is Schwab's release of its all-ETF 401(k) platform. We created our own 401(k) platform a few years ago. It's not 100 percent ETFs—it also uses some DFA [Dimensional Fund Advisors] funds. But we created that platform to provide ETFs to small and midsize businesses.
But we’re a very small company. We have several hundred million dollars in 401(k) assets under management , but we're small compared with Schwab, of course. Schwab's announcement will be remembered in the future as one of the turning points in the fund industry.
ETF.com: So the infrastructure's in place—everyone said that was the big impediment. And the infrastructure being in place for the mutual fund a generation ago led to all kinds of inflows into the 401(k) space via the mutual fund structure. Is this an analogous phenomenon that has just been unleashed for the ETF industry?
Edelman: Yes, it's exactly the same. People forget the history of the mutual fund industry. They forget that in the 1980s, employers picked the investments for their workers. And that changed in the late '80s when employers—because of regulation and litigation—turned over the investment decision to the workers. And in the course of doing so, they gave workers a menu of mutual funds.
Back then, Americans for the most part had never even heard of mutual funds. And we have to remember that in 1980, there were 400 mutual funds.
ETF.com: And how many mutual funds are there now?
Edelman: Over 13,000.
ETF.com: Is that all share classes?
Edelman: That's including all share classes.
ETF.com: That's a big number!
Edelman: Even without all the share classes, it's still a little more than 5,000 funds. And when employees got exposed to mutual funds via their 401(k)s, they began to realize the incredible benefits of mutual funds.
So, they asked: "Why don't I do this with my own money outside of the plan?" And that was what created the huge inflows of assets into the mutual fund industry, which has persisted to this day.