That's what Schwab(1) claims. There's a certain logic to Schwab teaming up with ETFs, as Schwab is also a low-cost, retail powerhouse that is not a 401(k) market leader. However, I can't say that I'm terribly convinced by the company's argument. Assuming that the operational challenge of fractional shares is resolved--which Schwab claims is the case--then ETFs are no worse than similarly priced mutual funds. But neither are they better.
The Maryland Public Policy Institute and Maryland Tax Education foundation has released a study of state pension funds that examines the relationship between the amount of fees paid by the states and their investment performance. The time period is the five years from July 2007 through June 2012. So far, I've just had a quick glance.
Here's an early entrant for "The Dumbest Funds of the 2010s" article that Dan Culloton and I will coauthor in early 2020. Would you buy bitcoins from these guys? I wouldn't. Nor from these fellas, either.
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I agree generally with the author's conclusions. I have a Schwab brokerage account and I can tell you from using their platform (which is very good I might add) that they are big on ETF's. Some 401k accounts have terrible fund choices with high expenses. We had a big debate about that when this author wrote a commentary on a Frontline piece about the impending retirement crisis. The things is most of the problems with cost and transparency can be solved if they let consumers direct their 401k assets to whichever brokerage firm gives them the best deal. I would rather see that approach than trying to throw ETF's into the 401k plan offerings. The reason some 401k plan options are so expensive and opaque is because the firms selling the funds want it that way. They know they have a captive audience and so they don't feel the need to change. One way or another they are going to make sure they continue to make as much or more than before. Making ETF's available in 401k plans is not a real fix or even a band aid because it fails to address the fundamental problem with these plans....limited choice.
That's why I chose the Optional Retirement Plan (ORP) versus the State Pension Plan when I joined my current employer. In the self-directed plan, I have a decent set of low-ER TIAA-CREF, Vanguard, American and Blackstone OEFs to play with in allocating my 403(b) contributions and assets. Frankly for retirement accounts, I think OEFs are ideal; the once-daily pricing can a) help minimse the desire/capability to "trade" them, and b) help protect you from intraday volatility in the markets.[1]
By contrast, in the State Pension system your assets become a tiny part of a larger chunk of "Other Peoples' Money" (OPM) which is managed by someone else and generally is locked up in there until you retire. The ORP not only is self-directed but the funds are portable if I ever change jobs -- ie, not locked in the State accounts until I retire. I don't trust faceless state bureaucrats deciding which funds or investments are "appropriate" or "smart" for some of my retirement assets. ;/
To put it bluntly, if I'm going to invest (ie, RISK) *my* money in the markets I want to be the one doing it --- and thus accept the responsibility for my actions and/or errors.
(BTW I am in Maryland)
[1] Such as those days when you see 2-300 point swings but end up flat or slightly positive on the day....the nature of OEFs force you to "do nothing" when "doing nothing" very well may be the prudent course of action.
By contrast, in the State Pension system your assets become a tiny part of a larger chunk of "Other Peoples' Money" (OPM) which is managed by someone else and generally is locked up in there until you retire. The ORP not only is self-directed but the funds are portable if I ever change jobs -- ie, not locked in the State accounts until I retire. I don't trust faceless state bureaucrats deciding which funds or investments are "appropriate" or "smart" for some of my retirement assets. ;/
To put it bluntly, if I'm going to invest (ie, RISK) *my* money in the markets I want to be the one doing it --- and thus accept the responsibility for my actions and/or errors.
(BTW I am in Maryland)
[1] Such as those days when you see 2-300 point swings but end up flat or slightly positive on the day....the nature of OEFs force you to "do nothing" when "doing nothing" very well may be the prudent course of action.
Re ETFs "not necessarily cheaper than index mutual funds and/or institutional share classes." John, I suppose you have a biased viewpoint, because your Morningstar 401K is probably run by people who know the first thing about investing. I think this is almost certanly the exception, rather than the rule. I have dealt with 401K plans for my three employers, as well as four others for family members. Basically, they all stink. They have very few funds; the funds are not selected at all for diversification - they may have two largecap growth funds, and no largecap value; and the fees are usually exorbitant. I think most companies don't know or care much about these plans, and allow them to be picked and managed by some aging hack from the accounting department, on his way out the door.
My current 401K has an SP500 index fund that beats the one you describe - it has expenses of only .007%. 0.7 basis points. But, so what? Even with zero expenses, it would still have 20-year annualized performance 3.2% lower than smallcap value DFSVX. 9.8% per year below emerging-mkt DFEVX, for 15 years. It is insane to offer 401K plans to people who won't need the money for more than 30 years, and then offer them only mediocre, low-yield asset classes.
Schwab's ETF plan will be valuable only if it offers participants a better menu of choices, If it is limited to a small menu of undistinguished funds, it will be no improvement.
My current 401K has an SP500 index fund that beats the one you describe - it has expenses of only .007%. 0.7 basis points. But, so what? Even with zero expenses, it would still have 20-year annualized performance 3.2% lower than smallcap value DFSVX. 9.8% per year below emerging-mkt DFEVX, for 15 years. It is insane to offer 401K plans to people who won't need the money for more than 30 years, and then offer them only mediocre, low-yield asset classes.
Schwab's ETF plan will be valuable only if it offers participants a better menu of choices, If it is limited to a small menu of undistinguished funds, it will be no improvement.
Expense ratio can make a massive difference. While the lowest cost index open ended mutual funds can be indeed cheaper than a nearly identical ETF, that is not what most 401(k)s use. Mutual funds have share classes of varying expense ratios whereas ETFs only have one. Not all 401(k) slates use the cheapest share classes, if they switched to ETFs, there would only be one option. Additionally, plenty of 401(k) slates have actively managed funds which are more expensive than a passive ETF. (With ETFs, it wouldn't even be possible for South Carolina to have an expense ratio of 1.3%!)
Also, just because 401(k) owners are ignorant of their investments in practice does not mean that transparency is not useful. A lot is said about how transparency better informs the investor (which I agree, may be largely irrelevant for the long term investor in passive funds) but not much discussion has been given to how transparency affects the management of a fund (active management will probably continue to exist as a part of 401(k) slates as long as it is legal and transparency matters).
Also, just because 401(k) owners are ignorant of their investments in practice does not mean that transparency is not useful. A lot is said about how transparency better informs the investor (which I agree, may be largely irrelevant for the long term investor in passive funds) but not much discussion has been given to how transparency affects the management of a fund (active management will probably continue to exist as a part of 401(k) slates as long as it is legal and transparency matters).
Ah, my fault. I initially wrote Schwab claims to be "the one." The One. Neo. The Matrix. Keanu. Get it?
Maybe not. It was a stretch to start with, and it doesn't work at all now that I changed the language of that sentence. Link removed.
Maybe not. It was a stretch to start with, and it doesn't work at all now that I changed the language of that sentence. Link removed.
What is this link supposedly to "Schwab(1) claims"?
http://media.animevice.com/uploads/0/9/3645-neo.jpg
http://media.animevice.com/uploads/0/9/3645-neo.jpg
They should have gone ahead and inculded all 57 states in the study.
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