A Push for ETFs in 401(k) Plans

Neil Plein
Photograph: Invest n Retire, LLC

While individual investors embrace exchange-traded funds, most 401(k)s savings plans give them the cold shoulder. Neil Plein, vice president of Portland (Ore.)-based Invest n Retire LLC, is on a mission to change that. Invest n Retire was awarded a patent last November for technology it developed to offer and trade ETFs in retirement plans. Bloomberg News's Margaret Collins spoke with Plein about the appeal of ETFs in 401(k)s. What follows is an edited transcript of their conversation.

Q. How prevalent are ETFs in 401(k)s now?

A. Exchange-traded funds make up a little under 1 percent of total assets in defined contributions plans in the U.S. The biggest issue is that you have systems, primarily record-keeping systems, that were designed for mutual funds with end-of-day pricing, among other things. When you have an ETF, you have an investment vehicle that trades intra-day, not end-of-day. The technology has needed to catch up to make ETFs available in retirement plans.

Q. What's the argument for having ETFs in retirement plans?

A. There is the cost-savings element. You have actively managed mutual funds that are not just expensive but that can have exceptionally high turnover ratios -- costs of trading ETFs don't have.

I prefer to have in 401(k) plans ETFs that have very small bid-ask spreads [the gap between the price at which investors can buy or sell the security]. When you're buying or selling or rebalancing portfolios, every basis point counts. That's why liquidity counts. We want ETFs with lots of liquidity that don't utilize any derivatives or aren't levered, so that they're easy to trade and will follow mainstream indexes.

Q. ETFs have come under fire in the past year by people, including regulators, who wonder whether they are driving some of the volatility in the market. What's your response to that?

A. I don't buy the concept of them having an effect on volatility. ETFs are still a drop in the bucket of daily trading volume. A lot of times people get exchange-traded notes mixed up with exchange-traded funds. [Exchange-traded notes, which are unsecured bank debt, are backed by their issuer's credit, unlike ETFs, which hold assets.] I'm not particularly fond of ETNs. I certainly don't think they have a place in retirement plans.

Q. What are the cons of adding ETFs into 401(k) plans?

A. The only negative I've seen personally is that it's a new idea. When you're talking about 401(k) plans and plan sponsors, this is a group that can sometimes be reluctant to go with new ideas like this.

Q. How did you start working on the issue of ETFs in 401(k)s?

A. I went to work for a big brokerage firm in January of 2010. I was a big proponent of ETFs and nearly lost my job because I was working on the 401(k) team there and suggested we start offering all-ETF plans. I just thought it was a better way to go than using expensive mutual funds for the plans we were working with.

Q. Does your company have ETFs in its retirement plan?

A. We have this equation that we advocate to help people build adequate retirement funds. We call it the three C's -- cost, compounding and contributions. Our own 401(k) is all ETFs. We use a Vanguard S&P 500 ETF and have the iShares Barclays Aggregate Bond Fund, for example.

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