PLANSPONSOR - April/May 2019 - 14

Upfront
Pros and Cons of ETFs in DC Plans
WITH the ongoing incidence of suits
being lodged against defined contribution
(DC) retirement plan fiduciaries
over what plaintiffs claim are excessive
fees, some plan sponsors may consider
exchange-traded funds (ETFs) for their
investment lineup.
Still, experts are mixed as to whether
ETFs that charge single-digit basis point
fees offer an advantage over institutionally
priced index funds. They say that
recordkeeping systems lack the capacity to
handle ETF trades; that the advantages of
ETFs are negated in a qualified, long-term
account; and that making intraday trading
an option for participants could distract
them from their work.
Currently, 91.7% of retirement
plans have traditional '40 Act
[Investment Act of 1940] mutual funds
on their investment lineup, says the 2018
PLANSPONSOR Defined Contribution
Survey Benchmarking Report: A mere 13%
of retirement plans offer ETFs.
But it is worth considering participants'
growing interest in the funds and
their explosive growth in assets during
the past decade.
Assets in ETFs in the U.S. increased
seven-fold from $716 billion in 2008
to $5.02 trillion in 2018, according to
Statista, a provider of statistics, consumer
survey results and industry studies.
Two retirement plan platforms that
were launched expressly to offer ETFs
are from Vestwell and Betterment. Adam
Schumm, CEO of Vestwell, specifically
wanted to offer ETFs on the Vestwell platform
that went live last year because the
funds have " become household names and
are more liquid and lower cost than mutual
funds. Plus, you don't have to worry about
the share class issues you have in the
mutual fund world, such as 12b-1 or other
back-end revenue-share fees, " he says.
In 2010, Betterment launched its
14 PLANSPONSOR.com April - May 2019
recordkeeping platform, starting off
exclusively as an ETF investing platform,
says Adam Grealish, the firm's director
of investing. Betterment wanted to offer
the funds because its platform supports
savings goals other than retirement.
" Many people are saving for retirement
in a taxable account or saving
for other goals in a taxable account, "
Grealish notes. " The tax efficiency that is
structural to an ETF product is a major
benefit. For the qualified accounts, this
is not going to matter, but for the taxable
accounts it does. "
Small plans that do not have access
to the low-cost institutional share classes
of mutual funds could also benefit from
including ETFs in their lineup, says Mitch
Reiner, chief operating officer (COO) of
Capital Investment Advisors.
When ETFs are included in accounts
designed to save for retirement, plan
sponsors should keep in mind that many
of the funds' benefits are cancelled out if
the retirement plan is a qualified plan,
says Brian Kraus, head of investment
consulting and internal sales at Hartford
Funds. " The ability to trade [them]
throughout the day, their tax advantages
and their transparency to their underlying
holdings are less of an advantage in the
defined contribution world, because [DC
plan] accounts are long term and buy-andhold
driven, " he says. -Lee Barney
Art by Sam D'Orazio
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PLANSPONSOR - April/May 2019

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