WisdomTree Launches 401K Platform

October 17, 2007

Firm offers vehicle to provide ETFs to retirement investors.

WisdomTree Investments, one of the few firms that creates and maintains the indexes that underlie its exchange-traded funds (ETFs), has added another dimension to its business. On October 8, it unveiled its own ETF platform for defined contribution plans.

The open-architecture platform features 11 funds from WisdomTree's own large family of ETFs—most of which are based on dividend-weighted indexes but also some earnings-weighted indexes—as well as select fixed income ETFs from iShares and Vanguard. A few open-end, no-load, actively managed mutual funds are also included in the offerings.

ETFs have been slow to take off in the 401(k) market for a number of reasons. For one thing, costs are an issue. Although ETFs are very cheap in comparison to traditional mutual funds and even many index mutual funds, the larger fund providers, such as Fidelity and Vanguard, do have some mutual funds that are even cheaper. But more importantly, ETFs come with brokerage commissions, which mean the average retirement investor—who invests a little money from each paycheck—would get hit pretty hard by commissions.

Another issue is motivation. Most sensible investors and plan sponsors are not interested in the fact that ETFs trade like stocks, as they are looking at the long term and at costs. And the tax advantages of ETFs matter less because 401(k)s already get preferential tax treatment.

Record keeping also is a significant obstacle. Most 401(k) platforms are set up to handle mutual funds, which trade once a day, not ETFs, which trade throughout the day. The data associated with ETFs cannot easily fit into formats designed for traditional mutual funds. Plan service providers would have to overhaul their record-keeping systems, which could get expensive.

But WisdomTree and other providers working in this space think these obstacles are overcome. Typically, these plans use omnibus trading to eliminate the issue of commissions, and sophisticated software to negotiate the record-keeping challenge. Meanwhile, low-fee ETFs present a low-cost option, particularly for smaller plans that are unable to reap the economies of scale that larger plans benefit from with traditional mutual funds.

And now, a new force is at work: The recent Pension Protection Act of 2006, which targets cost and transparency issues, among other things, requires greater disclosure of revenue-sharing practices from plan service providers. The revelations of hidden costs could be enough to make investors look to ETFs as a viable, transparent alternative to traditional mutual funds.

"We anticipate a shift in the way the retirement plan community thinks about investment strategies and related best practices," WisdomTree Director of Retirement Services Al Shemtob said in a press release.

"I think ETFs ... can absolutely revolutionize the way 401(k) plans are put together and operated," added WisdomTree Senior Advisor Arthur Levitt later.

WisdomTree is targeting 401(k) plans of less than $50 million. Its "Model Plan" is a wrap-fee, turnkey solution that allows investors their choice of six predetermined plans designed to meet different desired risk levels or retirement dates. Advisors can also offer investors a selection of actively managed 12b1-free, no-load mutual funds to round out their portfolio further. A custom plan is also available that allows the creation of customized portfolios.

The firm says the fees for its plans can be as low as 65 to 70 basis points, which includes expense ratios, record keeping, trading and custody costs—everything except the advisor's fee. Shemtob said WisdomTree's platform clearly lays out costs, such as those for record keeping and trading. According to ICI, mutual funds in 401(k)s have an average expense ratio of 74 basis points—not including other usual costs. This means that, in some cases, add-ons could drive costs for small plans up into the area of 250 basis points.

"I think [the platform] is appropriate in all segments of the market, but I think it will probably be best received in the market of $2 million to $25 million," says Shemtob.

WisdomTree is not the only company trying to bring ETFs to 401(k)s. The best-known firm in the space is Invest n Retire. Using its proprietary software, it provides a platform that addresses the record-keeping issue and keeps costs down by bundling trades and spreading the costs among multiple investors. Among its offerings are ETFs from the iShares, Rydex, Vanguard, SPDRs and PowerShares families. Invest n Retire also includes traditional mutual funds from Dimensional Fund Advisors. A business relationship between WisdomTree and Invest n Retire ended early on, before WisdomTree's funds were added to the other firm's platform.

BenefitStreet, another firm, provides a platform with record-keeping services that enable plans to offer ETFs to investors. It partnered earlier this year with iShares.

Setting aside issues of record keeping and expense, there is the question of whether WisdomTree's mainly dividend-weighted ETFs will appeal to investors and plan sponsors as core investments for a retirement plan. Still, WisdomTree has high hopes: Company president Bruce Lavine said that the new platform could contribute up to 20% of the firm's revenues within a year or two.


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