A 401(k) Boost

Exchange-traded funds help employees avoid high annual fees

Gates Home Furnishings has always been ahead of the curve when it comes to retirement plans. In the 1970s the Grants Pass (Ore.) company gave workers a choice between a defined-benefit plan similar to a pension or a defined contribution plan. It switched to a 401(k) in the 1980s, soon after those became available. Today the $8 million company, run by Giff Gates, the founder's son, is still on the cutting edge. In January, 2005, he moved his 50 employees to a new type of 401(k) that offers exchange-traded funds (ETFs) as investments.

One reason for the change: cost. Employees now pay annual expenses of about 1.1% of assets under management, compared with 2% in the previous plan, which offered only mutual funds. The company cut its cost of administering the plan by about 10%, to $420 a quarter. Because most administrative duties are handled by the plan provider, the switch has cut down on paperwork. "We're all really happy with it," says Gates.

ETFs have been around for more than a decade but have become a good option for retirement plans only in the past few years. ETFs consist of a set basket of stocks, bonds, or other securities that track a benchmark such as the Dow Jones industrial average or the Lehman Brothers U.S. Aggregate bond index. That way, investors know exactly what they're buying. And management expenses are lower than those of most mutual funds, a big plus in the recent low-return market.

Despite those advantages, ETFs didn't make sense in a 401(k) until recently, because investors have to pay a commission each time they trade shares. For 401(k) investors who regularly put small sums into their accounts, those commissions add up quickly. But now a few firms, including Invest n Retire in Portland, Ore., and ShareBuilder, have developed strategies to cut transaction costs, typically by bundling different customers' trades together. Tamara Bean, an adviser at the Everett (Wash.) independent firm BondStreet Wealth Management, estimates that annual expenses for an employee can run as high as 2% for a retirement plan that includes mutual funds, while expenses for ETF-based plans run between 0.75% and 1.1%.

The savings on the employer side can be substantial, too. Many 401(k) administrators charge between $1,300 and $2,500 a year. ETFs tend to fall at the lower end of that range, and some are even cheaper. ShareBuilder, for example, typically charges a startup fee of $750, plus $15 a month per employee.

Those savings got the attention of Vessel Statistics' Angela Meade. The $1 million, seven-employee engineering firm in Slidell, La., suspended its SIMPLE retirement plan in 2003 because it couldn't make the employer match this particular plan required. Meade, the company's accountant, found traditional 401(k)s too expensive. In December, 2005, she signed up for the Sharebuilder 401(k). "I was shocked by what some companies charged," says Meade. "A small company simply can't bear those expenses." Now, it doesn't have to.

By Adrienne Carter

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