401(k) Specialist Issue 2 - 2016 - 26

INVESTMENTS
''
You can get
all the (same) stuff
through an open-end
mutual fund very
inexpensively. The
only difference is,
you're trading at
the end of the day,
as opposed to
(ETFs) trading
during the day.
''
" There's been an explosion of offerings
among the big brokerage houses to offer
ETF trading for no transaction fee or no
commission, " he notes. " You've got Charles
Schwab, Fidelity, TD Ameritrade that provide
a whole list of no-transaction-fee ETFs
that are available. Here you are getting great
diversification, tax efficiency, for a very, very
low price within the product. "
The result, he argues, is that commission-free
products could remove one of the
biggest barriers to including ETFs in 401(k)s.
Lydon also believes one of the reasons
ETFs are thriving is that a strong market
in post-recession years has made more
Americans eager to invest, and the trend
has favored cost-effective, index-related
strategies that emphasize tax efficiency. The
ETF industry is responding with remarkable
creativity, introducing " smart beta " products,
currency hedging products, and ETFs that
address intriguing, thinly sliced sectors.
" There's kind of a rock-star status for
ETFs right now, " he explains, adding that
their popularity could be harnessed to boost
participation in 401(k) plans, something that
he himself has done with his own firm.
" In our company, six years ago, we
RICK FERRI
transferred our 401(k) plan over to ING
Direct because they offered ETFs, and we've
been thrilled with the fact that they've been
available. I felt obligated, as we were pushing
to have ETFs within 401(k) plans, that we
make that move. "
More choices, more competition, and
rock-star status; what's not to like?
ASSESSING ETF CHALLENGES
Not so fast, says Rick Ferri, CFA. He appreciates
ETFs, which he says have " helped
drive down the price of all fund management,
not just exchange traded funds but
mutual funds as well. "
Nonetheless, Ferri, author, blogger,
managing partner of Portfolio Solutions and
self-described " purist, " is not a fan of ETFs
in 401(k) plans.
" You can get all the (same) stuff through
an open-end mutual fund very inexpensive26
ISSUE 2 2015 | 401kSpecialistmag.com
ly, " he says. " The only difference is, you're
trading at the end of the day, as opposed to
(ETFs) trading during the day. As an employer
...the last thing I want my employees
to do is be trading their ETFs during the
day. I'd rather have them working. "
Ferri also feels ETFs add complexity and
confusion to the 401(k) world, and that's
not likely to make the Department of Labor
happy. He admires the Thrift Savings Plan
created for federal employees-basic stock
and bond index funds. If plan participants
want access to commodities and other
" non-traditional " asset classes that ETFs
offer, he suggests they open a Roth IRA.
" They're not the trustee; I am, " Ferri says.
" I have to do what's in the best interest of
the entire plan and the company to make
sure I don't get sued by my employees later
on. If my employees come to me and say,
'We want this commodity ETF, we want
these currency ETFs, how about this triple-leverage
short ETF?' No. "
" ERISA's pretty picky about cost disclosure, "
Dave Nadig, vice president and director
of ETFs for FactSet Research Systems,
adds. As his title-director of exchange
traded funds-implies, he's a fan of ETFs in
general. But Nadig believes layering an ETF
structure on top of a 401(k) structure can
make disclosure and participant communication
murky.
" I do think there are some risks just from
the plan sponsor's perspective, " he says.
Nadig encourages plan sponsors and
advisors who work with them to be skeptical
" just like you would about any other
investment vehicle you're putting out there
for plan participants. "
DEALING WITH INTRADAY TRADING
Because ETF investors can trade throughout
the day, in a 401(k) context, it raises
questions regarding inconsistent pricing and
determining exactly when trades settle.
" Part of the hidden costs in ETFs at times
are the bid-ask spreads, " says Joshua P. Itzoe,
CFP, AIF, a partner and managing director
of Greenspring Wealth Management's Insti
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401(k) Specialist Issue 2 - 2016

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