ETFs Start Finding Way Into Retirement Plans

BenefitStreet, which provides retirement plans to companies, started offering ETFs on its 401(k) platform in June, partnering with Barclays Global Investors. Spokesman Brian Ruby says the firm has received $150 million in commitments from retirement plans thus far.

Barclays has been working with several firms to offer ETFs in retirement plans.

Spokesman Lance Berg says technology has advanced enough to allow firms that administer plans to offer them.

Berg says cost is another factor. ETFs generally cost less than most funds, and regulators such as the Department of Labor have paid more attention to plan costs in recent years.

ETFs usually are cheaper because they track indexes and don't have managers.

Trusts

Avatar Advisors President Ted Theodore says his firm has about a dozen plans that want to use collective trusts with ETFs in their plans.

The trusts are pools of assets similar to mutual funds, but governed under banking rules rather than the 1940 Securities Act.

Theodore says the workers in the plan can choose either the collective trusts or from a set of ordinary mutual funds.

Someone in the plan would choose a collective trust with a certain risk level.

Avatar serves plans with $2 million to $10 million. Theodore says that so far the demand for ETFs has come from smaller plans.

That's because the cost of a plan becomes more significant when the asset levels are smaller.

Typically, a retirement plan will cost 1% to 2% in the assets.

Costs Lower

Robert Taylor, CEO of AdvisorAlliance, also notes the cost of a plan probably will drive more employers to seek something cheaper than mutual funds.

He says the firm has 22 clients that have expressed interest in getting ETFs into 401(k)s.

Avatar serves plans that average about $5 million, with the largest being $40 million.

ETFs can also help reduce costs for plan sponsors. Taylor says his firm usually might charge up to 1.8% for running a plan. That number can come down to 1% if ETFs are used rather than funds.

Even though clients seem excited about it, Taylor notes the market is still young. "We're at the embryonic stage," he said.

Taylor says the real challenge for advisors that want to offer ETFs as part of a retirement plan is finding a third-party administrator for the plan. Avatar works with BenefitStreet, he notes.

Few other administrators have been willing to commit to ETFs, he says.