One of the biggest roadblocks to wider use of exchange-traded funds has been their absence from 401(k) programs. After all, total assets in 401(k)s are approaching $4 trillion, representing close to one-fifth of all U.S. retirement dollars.
Currently, mutual funds represent a big chunk of this capital, and are pretty much the engine for mutual funds’ continued dominance over ETFs on the assets under management front. Some estimates suggest that close to 41% of all mutual fund assets are held in retirement accounts, underscoring how critical this segment is to the broad mutual fund industry.
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Some ETF-advocates have tried to rectify this situation by bringing ETF-focused 401(k) plans to market, though most of the companies that have done this so far have been quite small. This appears to be changing though, as investment giant Charles Schwab (SCHW) has just revealed its plan to become the first major firm to launch a full-service 401(k) program based on ETFs.
Inside Schwab’s New Program
The new system will go under the Schwab Retirement Plan Services, Inc. umbrella, a national 401(k) service provider to roughly 1.3 million workers, and will help make ETFs more accessible for the average investor. This may also help investors to reduce costs, as low-cost index-based ETFs are often times cheaper than their mutual fund peers (read ETFs vs. Mutual Funds).
The program will also incorporate commission-free intraday investing, and partial share purchases for investor accounts. This is a big deal, as both of these issues are often seen as the major roadblocks for ETF usage in many 401(k) systems.
ETFs to Be Offered
Though the program is probably still a few months away from being implemented, the company did announce that there would be at least 80 low-cost funds that would be part of the program, and that they would come from 25 asset categories.
Obviously, Charles Schwab’s own funds look to be at the center of this program, and especially their extremely low cost index funds which meld perfectly with this new 401(k) program. In particular, the Schwab U.S. Broad Market ETF (SCHB) and the Schwab U.S. Large Cap ETF (SCHX) look to be centerpieces of the plan, as they both charge investors just 0.04% a year in fees, the lowest in the entire equity ETF world (see all the Cheapest ETFs here).
Beyond these likely candidates, Schwab did highlight a few other providers as firms that will participate in the program including ETF Securities, First Trust, Guggenheim Investments, Invesco PowerShares, iShares ETFs, PIMCO, State Street Global Advisors, Van Eck Global, Vanguard and United States Commodity Funds.
Given this lineup, it is pretty reasonable to assume that bond funds (from PIMCO), and commodity products (via ETF Securities and United States Commodity Funds) will be included in the 401(k) offering, suggesting that a pretty diversified offering will be available to investors.
One of the most important ways that people invest is via their retirement accounts, and especially in their 401(k)s. Currently, the space is dominated by mutual funds and if ETFs ever want to surpass their investment cousins, they must find a way to effectively break into this space (also see 5 Solid ETF Investment Picks for Retirement).
Though they have been concerns regarding ETFs in 401(k) retirement plans due to partial share trades and commission costs, it appears as if some are finally cracking the code. Charles Schwab is the biggest so far to embrace an ETF model for 401(k)s with its latest program, and if it takes off, it could really help ETFs to not only gain share against mutual funds, but for ETFs to be considered as viable selections for this type of retirement account as well.
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