401(k) Specialist Issue 2 - 2016 - 28

INVESTMENTS
'' There's kind
of a rock-star
status for ETFs
right now.
''
of questions and creates some potential risks
there, even if you've done something that's
actually in their best interest, " Roberts says.
Itzoe goes so far as to argue 401(k)s
negate some of the very qualities that make
ETFs popular.
" I think ETFs are really effective in a
taxable account, " he adds, but within a
tax-deferred defined-contribution plan,
ETF tax efficiency doesn't apply. " It's much
more sizzle than steak with ETFs in 401(k)
plans. We don't have ETFs in any plan and
we're not getting demand for it. "
He believes the same goals can be achieved
with index mutual funds, many of which are
virtually identical to their ETF counterparts.
" If you look at the Vanguard S&P 500
TOM LYDON
ETF, it's got an expense ratio of 0.05 percent, "
Itzoe says. " If you go to the Vanguard
500 Index Fund Admiral Shares, which is
what we tend to use for our clients, it's got
an expense of 0.05 percent; it's exactly the
same, and with the Vanguard 500 Fund,
you're not paying commissions on the trade. "
Itzoe believes ETFs encourage a
day-trading attitude, adding, " I don't think
that's great from a participant behavior
standpoint. " From what he's observed,
vendors who offer ETFs in retirement plans
usually aggregate all of the trades for endof-day
purchasing.
" [It's] just like a mutual fund, " he says,
" so why would you not just use a mutual
fund for that? In some ways, the industry's
creating products that allow people to go
from speculating on individual stocks to
speculating on sectors. Having sector funds
in a 401(k) plan is stupid. "
He thinks many ETF sectors are too esoteric
and narrowly defined (a quick Internet search
reveals sectors ranging from livestock and copper
to fertilizer and the gaming industry).
" From a fiduciary perspective, we advise
all our clients to provide broad index
funds, don't provide sectors-you're just
encouraging your participants to make
really dumb investment decisions, " Itzoe
adds. " In the same way that I would advise
clients, from a fiduciary perspective, 'Don't
28 ISSUE 2 2015 | 401kSpecialistmag.com
put a health care mutual fund in your plan,'
I'd say 'Don't put a health care ETF in
your plan either.' "
He suspects technology may not have
caught up with the idea of ETFs in 401(k)s. It's
one thing to place an isolated trade within
an individual's brokerage account or IRA,
and another thing to place hundreds of
thousands of trades for 401(k) plan participants.
He encourages advisors to ask, " How
is the provider managing the placement of
trades within the plan? "
" I think there are real potential risks to
using ... ETFs the wrong way, from a fiduciary
perspective, " Itzoe says. He thinks the
trend is for plan sponsors to hire more experienced
consultants and advisors, focusing
more on 401(k) specialists, who he thinks
would be less likely to recommend adoption
of ETFs in 401(k) plans.
" ETFs provide tracking exposure to an
index, low costs and tax efficiency, " he argues.
" And when I look at 401(k) plans, index
mutual funds provide tracking exposure
to an index, low costs-in fact lower costs
in many cases (because) in 401(k) plans,
you're not paying commissions on your
trades-and you don't need tax efficiency. "
LOOKING TO THE FUTURE
After all that, it's not surprising that Itzoe
expects ETFs to remain a " fringe product "
in 401(k)s for the next two to five years.
However, he agrees with other advisors interviewed
that wider adoption of ETFs into
401(k)s is probably inevitable.
" In the case of some 401(k) providers,
they're just not motivated because change
costs money (and) change probably translates
into lower expenses, " Lydon concedes. Yet he
remains hopeful: Technology will improve;
reporting software will be refined; pricing and
trading issues will yield to new methodology.
" The firms coming in to compete have
some very deep pockets, " he concludes.
Lance Ritchlin is former editor of the Journal of
Financial Planning and now a freelance writer and
marketing consultant.
http://www.401kSpecialistmag.com
401(k) Specialist Issue 2 - 2016

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