Conditions are improving for the increased use of exchange-traded funds in 401(k) plans, according to their proponents in the third-party administrator and investment fields. Before then, however, acceptance both psychologically and technically must occur.
First, the provisions of the Pension Protection Act that go into effect in January demanding uniform fee disclosure and transparency make ETFs suitable, as they lend themselves to reporting transparency, according to Alvin Rapp, founding partner of RPG Consultants, a retirement plan consultant and TPA. RPG uses an open-architecture, daily valuation recordkeeping platform that allows the use of ETF's as an investment choice.
"Financial advisors in their fiduciary duty should be evaluating the cost and transparency requirements in the PPA," Rapp says.
New Department of Labor rules will lead to "more efficient investing in retirement platforms, sending an increasing percentage of dollars to ETF-intensive plans," Rapp said in a recent white paper he wrote.
"I think ETFs will represent 10% to 20% of retirement portfolios minimally over the next five years–or that is where it should be," Rapp says. He encourages advisors who use his firm to build lifestyle strategies solely using ETFs .
Darwin Abrahamson, founder and CEO of Invest n Retire, a 401(k) recordkeeper and technology company in Portland, a believer in incorporating ETFs into 401(k) plans, is seeing rapid growth in both the number of plans his company has signed up as well as the size of those plans, and he says most of the assets in those plans are in ETFs. He attributes the growth to the impending DOL fee disclosure rules and the ability to fulfill fiduciary duties. Moreover, the Investment Company Institute has asked his company to start reporting the ETF percentage in 401(k) plans starting at the end of the year, a sign that it is on the ICI radar and that more growth is expected.
