401(k) Specialist Issue 2 - 2016 - 27

INVESTMENTS
tutional Client Group.
Lydon acknowledges there are trading
issues: " On top of that you have a reporting
issue, because somebody might have done a
trade in the morning, somebody might have
done something in the afternoon-they're
not going to be the same-where with
a mutual fund, everybody gets that day's
closing price. "
But Lydon doesn't believe the problem is
insoluble. Limits can be placed that discourage
frequent trading, he says, adding, " There's
always the ability to offer trading in batches
toward the end of the day. "
HANDLING MODELS CAREFULLY
There are numerous caveats when it
comes to using ETFs in 401(k)s, according
to Jason C. Roberts Esq. Roberts
works with many retirement plan sponsors
and service providers as CEO of Pension
Resource Institute LLC. and a founding
partner in Retirement Law Group PC.
" We tend to see ETFs used [in 401(k)s]
when the RIA that's advising the plan may
have an ETF strategy for their wealth management
or their high-worth clients, and
they want to map the same strategy over
into the plan, " Roberts says.
One way to do that is through a managed
solution, an increasingly popular method
that bundles ETFs under an asset model or
asset allocation portfolio. Such a strategy
can give the advisor an " economies of scale "
advantage, he believes, because the " research
and the effort that goes into creating and
monitoring and allocating and reallocating
and rebalancing the model is spread across
more clients. "
RIAs that decide to augment a plan's core
investments with an ETF model portfolio
should be prepared for additional reporting
and disclosure requirements under ERISA
Rule 404(a)(5), Roberts says. Rules originally
written for mutual fund companies
may be tough for RIAs who lack necessary
tools, yet some providers help facilitate the
additional compliance burden.
If you're evaluating someone else's model,
be aware that it could mask inherent
weaknesses in individual sector ETFs and
commodities-a misleading gold fund, for
example.
" The unsuspecting participant may see
double-digit returns and jump all in to
something that's extremely volatile and
not necessarily a long-term retirement
investment option, " Roberts says. He urges
advisors to be especially mindful of their
fiduciary duty and avoid inadvertently presenting
participants with faulty models.
CHANGING FEE STRUCTURES
Although it sounds ironic, Nadig thinks
one reason mutual funds have been popular
in 401(k) platforms is that they are more
expensive.
" But that extra expense has allowed
mutual funds to [pay for] record-keeping
expenses and administration expenses in
countless 401(k)s, " he says. " When you start
thinking about ETFs in that context and
you're putting an eight- or nine-basis-point
ETF in your portfolio, that's probably not
going to fund the pure cost of managing
that 401(k) plan or tending to your statements
or keeping the website up. "
Roberts notes that traditional mutual
funds may generate some degree of revenue
sharing, such as 12b-1 or sub-transfer agent
fees. Smaller plans often are drawn to that
model because they can use the fees to offset
costs of providing services to the plan.
" If you're an RIA, you're going to be able
to negotiate a fee with that plan sponsor,
and so, the revenue generated from funds is
less of a consideration, " Roberts says.
But plan sponsors may be reluctant to
adopt an all-ETF strategy, even if part of the
cost is paid out of participant accounts. Such
debiting of accounts is subject to ERISA's
404(a)(5) Participant-Level Fee Disclosure.
Plan participants who think they've been
paying no fees may be stunned when heightened
disclosure suddenly shows their plan
charges in hard dollars on their statements.
" Even if it is cheaper, a lot of times participants
start complaining or it raises a lot
ISSUE 2 2015 | 401kSpecialistmag.com 27
JASON C. ROBERTS
'' We tend to see
ETFs used in
401(k)s when the
RIA that's advising
the plan may have an
ETF strategy for their
wealth management
or their high-worth
clients, and they
want to map the
same strategy over
into the plan.
''
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401(k) Specialist Issue 2 - 2016

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