ETFs in U.S. Pension Plans

Financial Times columnist Mariana Lemann discusses the obstacles and possibilities for ETFs in US Direct Contribution plans in her recent article, “ETFs Knock at the US Pension Door”.

The $4,500 billion direct contribution plan (401(k)) business could represent the final frontier for ETFs. Only a small fraction of ETFs are held in 401(k) plans, but providers have high hopes. Providers feel it is just a matter of time before ETFs become widely accessible to 401(k) plan participants.

Although the low cost structure and fee transparency are helping ETFs, significant infrastructure and technological hurdles face ETFs. “401(k)s were not built to support seamless record-keeping of traded securities,” says Robert Nestor, head of Barclays Global Investors iShares product management. Nestor believes the that the issue is “retrofitting the platforms in order to support traded securities.”

Another hurdle is that ETF’s intraday trading and tax efficiencies are nullified in a defined contribution setting. Advocates for ETFs in direct contribution plans argue that losing these two advantages will not diminish their overall utility within a 401(k) platform.

Despite the hurdles, many providers are starting to see the opportunities ETFs may provide for their platforms. In a recent survey, 80% of direct contribution providers said they expected ETFs’ inclusion in 401(k) plans to rise. D.J. Lucey, senior analyst for Cerulli Associates cites the wide variety of markets being offered now by ETFs as a reason for the expected increase in ETF use.

The ETF Directory at ETF MarketPro contains more Exchange Traded Fund information and news.

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