Don't Write Off ETFs in 401(k)s Yet

by: Index Universe posted on: July 18, 2008

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By Jim Wiandt

Matt Hougan - I'm not sure I'd just write off 50% of the mutual fund market.

One thing I DON'T question is the fact that there's not as yet much going on in 401(k) plans with ETFs. There's been a lot of noise around this for a long time with little of substance going on. The problem is that the structure of the 401(k) system is atrocious and tailor-made not only for traditional mutual funds, but for mutual fund companies to enjoy captive, sticky distribution.

It's also an expensive system to administer even for mutual funds. But it's where a LOT of investors are (paying way too much for a mainly horror-show lineup of funds).

But what I DON'T agree with, and Larry and Matt both seem to be almost taking the conclusion of the Blanchett article as a given, is that there's not room for ETFs to enter the market. I actually DO think the issue will be solved, and it won't involve shutting down the 401(k) system. I think it will come more from the power of the ETF business than pressure on the system for reform from an investor standpoint. The ETF product issuers are pushing hard to make some headway in the area...so something big happening to accommodate a shift would not surprise me. It's a question of when, how, and how much, I'd say.

And a $600 billion industry, already the fastest-growing part of the financial services industry, is at work on it.

I do really like Larry Carrel and then Matt laying out that the ETF issuers themselves don't provide access to ETFs to their own employees, by and large. If anything underscores the magnitude of the problem, that does.

As a side note, I also have the suspicion that Matt is overestimating the market share of 401(k) plans. Tax-deferred accounts under the ICI's definition presumably include IRAs as well (and I know I can buy ETFs in MY IRA accounts), and they've got some big-time assets.

I mean, frankly, 401(k) is SUCH a bad system (and anyone who has read my columns knows how I rail against 401(k) plans), that I've GOT to maintain some hope that ETFs can break into the space and snag some market share the way they have everywhere else.

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