As was recently reported in The Wall Street Journal, brokerage firm Charles Schwab is now leading the charge on bringing exchange traded funds (ETFs) to 401(k) plans. By now, most investors have become at least somewhat familiar with ETFs and the benefits they can offer including lower fees, greater transparency, and easier access to a wider variety of asset classes. ETF assets have quickly grown to nearly $1 trillion and show no signs of slowing. However, employer sponsored 401(k) plans have been slow to adopt ETFs as an investment option for plan participants. One of the primary reasons for this is that 401(k)s have traditionally been the gravy train for large mutual fund companies to grow their typically expensive actively managed mutual funds. Look under the hood of any all-mutual fund 401(k) plan offering and it’s not unusual to see average mutual fund expense ratios run 1% to 1.5%+. Compare that with the average expense ratio of an all-exchange traded fund offering, which typically runs 30bps to 50bps. Obviously, large mutual fund companies are hesitant, if not outright reluctant, to offer products that may significantly eat away at healthy revenue streams – even if those products may be more beneficial to individual plan participants.
That makes Schwab’s foray into this space even more impressive as the company seems focused on doing what’s right for investors, while also recognizing that the future of their company may very well depend on being a leader in the mushrooming ETF space. As we’ve discussed in the past, Schwab has continued to expand their own proprietary ETF offerings with a focus on broad based ETFs at rock bottom expense ratios. Without a doubt, these ETFs will be the centerpiece of Schwab’s 401(k) investment menu, though Schwab is expected to offer ETFs from other providers as well. In referencing the mood of the large mutual fund companies and brokerages attending the asset management conference where Schwab made their announcement of bringing ETFs to 401(k)s, Mike Alfred, co-founder of an independent rater of 401(k) plans told the Wall Street Journal, “You could tell the rest of the room was nervous about it. The idea is disruptive.”
At The ETF Store, we’ve partnered with several 401(k) providers and currently offer a number of all-ETF 401(k) plans to businesses. We’re extremely pleased with the leadership Schwab is taking in this arena and believe this will only help to enhance the existing all-ETF 401(k) offerings and bring additional awareness of the potential benefits of ETFs to a larger group of investors.
