PLANADVISER - May/June 2019 - 47

Andrew Windsor, a retirement investment consultant with
Unified Trust Co. in Lexington, Kentucky. " Those transaction
costs would eat into participants' returns, " he points out.
Moreover, there would be some trading inefficiencies, as
mutual funds trade in fractional shares, whereas ETFs are
priced at whole shares, Windsor continues. So, for example,
if a retirement plan participant wants to invest $100 but his
chosen ETF is priced at $125, his trade will wait for the next
contribution, Windsor says. " Cash would be set aside before
being invested, " he notes. This is true for all ETFs regardless
of the platform, he says. However, some get around this by
trading the ETFs at the plan level, where they can aggregate
trades, Windsor says.
Kip Meadows, CEO of Nottingham in Rocky Mount, North
Carolina, says that while most recordkeeping platforms
can handle only mutual
funds, Vestwell
and Betterment are two platforms recently
launched with an express interest in offering
ETFs. In fact, Nottingham's own retirement
plan has ETFs in the lineup because the firm
is interested in offering participants exposure
to niche sections of the market that
some ETFs track-specifically " different
parts of the economy, different geographic
areas of the world and different industries, "
Meadows says. As a trustee, he says, he is
unconcerned about offering
exposure
to
niche markets, but, as a fiduciary, he would worry about
holdings of more than 10% in any one niche market.
" If you want to be diversified, these solutions make
a lot of sense, " Meadows adds. " Now that the ETF market
has become mature, as more employers hear from their
employees that they want to invest in the funds, their plan
administrators will make it happen. "
However, says Kraus, many of the inherent advantages
of ETFs are negated in the 401(k) world. " The ability
to trade ETFs throughout the day, their tax advantages
and their transparency to their underlying holdings are
less of an advantage in the defined contribution world,
because those accounts are long-term and buy-and-hold
driven, " he explains.
Mitch Reiner, chief operating officer (COO) of Capital
Investment Advisors in Atlanta, says that, were participants
to day-trade ETFs, that would be a major distraction
from the real goals of the retirement plan as an employee
benefit. And, while the single- or double-digit basis-point
expense ratios of ETFs are attractive, retirement plans can
often access very low-cost institutional shares of mutual
funds, Reiner says. However, he concedes, ETFs could be an
appealing option for smaller plans that lack access to the
same pricing advantages.
The Vestwell and Betterment platforms, however, find
that retirement plans are very interested in offering ETFs.
In fact, on the Vestwell platform, the same percentage of
assets-49%-are found in ETFs as in mutual funds, the
remaining 2% in collective investment trusts (CITs).
Aaron Schumm, CEO of Vestwell, in New York City, specif " Mutual
fund shareholders' taxes are influenced by
redemptions from other shareholders, " he says. " The fund
has to sell shares to meet redemptions, which in turn hits
investors with capital gains. ETF shares, on the other hand,
are bought and sold on the secondary market. "
Additionally, Grealish says, Betterment helps participants
" set their retirement target amount and advises them
on how much they need to save and what level of risk to
take to achieve that goal. "
The firm also purposefully decided to build its platform
around ETFs because " other service providers have
proprietary funds that sometimes include revenue-sharing
fees, " says Amy Ouellette, director of retirement services
at Betterment, also in New York, although she notes that
R6 share classes are growing. That said, Ouellette observes
that funds with revenue sharing " have inherent conflicts of
interest and are opaque. "
According to Reddy, as defined contribution and defined
benefit (DB) plan sponsors in the U.S. begin to understand
the funds' advantages and take the cue from international
pension plans, " ETFs in retirement plans will become one
of the biggest areas of growth " for the exchange-traded
fund industry. " As many actively managed mutual funds
have underperformed, benchmark tracking in a more
liquid manner that doesn't generate capital gains is going to
become a lot more important, " he says.
Additionally, " as fee compression continues, access to
markets at a lower price will make ETFs all the more attractive
to " retirement plan sponsors and participants alike,
Reddy says. -Lee Barney
Nottingham's own retirement plan
has ETFs in the lineup because the
firm is interested in offering participants
exposure to niche sections of the
market that some ETFs track.
ically wanted to offer ETFs on Vestwell's platform, which
went live last year. He says his reasoning was that they 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. " The average ETF
net expense ratio for an investment program on Vestwell is
20 basis points, versus the average mutual fund net expense
ratio of 40 basis points, Schumm says.
Betterment for Business
launched its recordkeeping
program in 2010, starting off exclusively as an ETF investing
platform, says Adam Grealish, director of investing at the
firm in New York City. The reason Betterment wanted to
offer ETFs is because its platform supports savings goals
other than retirement.
planadviser.com May-June 2019 | 47
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