by DireWolf » Sat Feb 01, 2014 8:04 pm
So our group has been
advised by our 401k custodian that it might be beneficial to convert our 401k
plan to an ETF based plan as opposed to our current Mutual Fund based plan. Of
course I haven't heard any reasons why.
Does anyone have opinions on the potential pros and cons of either type of plan?
Thank you.
Does anyone have opinions on the potential pros and cons of either type of plan?
Thank you.
by livesoft » Sat Feb 01, 2014 8:05 pm
I see only negatives.
Why does the custodian say this? And I love ETFs, but not for a 401(k) plan.
Negatives:
Confusion by employees. Their plan will be difference from the spouse's plan.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
Too many choices. The tyranny of choice is a big deal.
How do you do target retirement and balanced funds with low expense ratio ETFs?
I don't see any pros that cannot also be had with low-expensive ratio passively-managed index funds.
I suppose if there are only 3 employees that they can be educated about ETFs and make do.
Negatives:
Confusion by employees. Their plan will be difference from the spouse's plan.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
Too many choices. The tyranny of choice is a big deal.
How do you do target retirement and balanced funds with low expense ratio ETFs?
I don't see any pros that cannot also be had with low-expensive ratio passively-managed index funds.
I suppose if there are only 3 employees that they can be educated about ETFs and make do.
It's all about
short-term opportunistic rebalancing due to a short-term change in one's asset
allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I
mean market timing.
by JamesSFO » Sat Feb 01, 2014 8:54 pm
livesoft wrote:I see only negatives. Why does the custodian
say this? And I love ETFs, but not for a 401(k) plan.
Negatives:
Confusion by employees. Their plan will be difference from the spouse's plan.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
Too many choices. The tyranny of choice is a big deal.
How do you do target retirement and balanced funds with low expense ratio ETFs?
I don't see any pros that cannot also be had with low-expensive ratio passively-managed index funds.
I suppose if there are only 3 employees that they can be educated about ETFs and make do.
Negatives:
Confusion by employees. Their plan will be difference from the spouse's plan.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
Too many choices. The tyranny of choice is a big deal.
How do you do target retirement and balanced funds with low expense ratio ETFs?
I don't see any pros that cannot also be had with low-expensive ratio passively-managed index funds.
I suppose if there are only 3 employees that they can be educated about ETFs and make do.
Our new provider suggested considering an ETF-based plan recently I was told you get the closing price (not the NAV) for 401K purchases/sales, it was a finite list.
I didn't drill down further, but given that the price is known I would assume you can end up with fractional shares.
Anyhow, there are target retirement ETFs (e.g. iShares has them) -OR- the provider will aggregate some of the ETFs into a bundle. I didn't go with it so I don't know more.
by in_reality » Sat Feb 01, 2014 8:56 pm
livesoft wrote:I see only negatives.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
I don't see any pros that cannot also be had with low-expensive ratio passively-managed.
Costs will probably not be so transparent.
Will fractional shares be allowed?
Can one look up the prices the shares were purchased at? Since ETFs are not bought at end-of-day like mutual funds, this could be very confusing.
I don't see any pros that cannot also be had with low-expensive ratio passively-managed.
I like to be positive so here goes:
IShares and wisdomtree both claim their etf fees are fully transparent in 401ks
The fractional share issues appears to have been solved by executional parties which also solves the settlement date issue if you are switching between holding a mutual fund an etf.
A plan may report an average cost to solve the price issue
Etfs won't have a cash drag on performance as they can stay 100% invested since there are no requirements to hold cash for redemptions
Etfs have no 12b-1 marketing fee
Etfs can be traded on an omnibus basis to pool transactions and lower costs.
by DireWolf » Sat Feb 01, 2014 10:38 pm
I like the fact that
ETFs traditionally have low fees, but the fee structure can be harder to
understand. I also don't understand ETFs as well as I do mutual funds, so there
is some anxiety.
by JamesSFO » Sun Feb 02, 2014 12:21 am
DireWolf wrote:I like the fact that ETFs traditionally have
low fees, but the fee structure can be harder to understand. I also don't
understand ETFs as well as I do mutual funds, so there is some anxiety.
How is the fee structure harder to understand? Each ETF in the offering will have an ER and each mutual fund in your current line up has an ER?
I'm not claiming that you should make the switch but I'm not sure what fee structure you think will be more complex?
by DireWolf » Sun Feb 02, 2014 12:57 am
JamesSFO wrote:
DireWolf wrote:I like the fact that ETFs traditionally have
low fees, but the fee structure can be harder to understand. I also don't
understand ETFs as well as I do mutual funds, so there is some anxiety.
How is the fee structure harder to understand? Each ETF in the offering will have an ER and each mutual fund in your current line up has an ER?
I'm not claiming that you should make the switch but I'm not sure what fee structure you think will be more complex?
The bid-ask spread in particular.
by NightOwl » Sun Feb 02, 2014 1:52 am
DireWolf wrote:So our group has been advised by our 401k
custodian that it might be beneficial to convert our 401k plan to an ETF based
plan as opposed to our current Mutual Fund based plan. Of course I haven't
heard any reasons why.
Does anyone have opinions on the potential pros and cons of either type of plan?
Thank you.
Does anyone have opinions on the potential pros and cons of either type of plan?
Thank you.
Hi DireWolf,
I have a question: does an "ETF-based plan" require your employees to go online and actually trade ETFs in order to get their money invested monthly (assuming that's what they are doing), or is there some kind of automatic investment opportunity?
If your employees have to go online and enter an order, I'm with livesoft: disaster. I have been reading this forum for years now, and I make maybe one or two ETF trades per year; I'm still hesitant to trade on the open market. Sending employees who are not familiar with limit vs market orders and bid/ask spreads into the market to purchase or sell ETFs monthly would be a very bad move, IMO.
Also, to be clear for everyone, most 401(k) committee members are functionally barred from offering any kind of advice to their peers, lest they be accused of violating their fiduciary duties.
NightOwl
"Volatility
provokes the constant dread that some investors know more than we do, making us
fearful of ignoring such powerful price movements." | Peter Bernstein,
"The 60/40 Solution."
by JamesSFO » Sun Feb 02, 2014 2:39 am
NightOwl wrote:[
I have a question: does an "ETF-based plan" require your employees to go online and actually trade ETFs in order to get their money invested monthly (assuming that's what they are doing), or is there some kind of automatic investment opportunity?
I have a question: does an "ETF-based plan" require your employees to go online and actually trade ETFs in order to get their money invested monthly (assuming that's what they are doing), or is there some kind of automatic investment opportunity?
Not the OP, but I will answer, it works just like a MF based 401K, you pick a default contribution and it gets auto-invested in those choices. It isn't a no holds barred ETF supermarket, but a defined list of choices they are just ETFs instead of MFs.
EDIT: This article shares some insight, it works just like a MF you invest exact $ and the custodian handles the details and allows fractional shares:http://www.etf.com/sections/features/20 ... -live.html
Last edited by JamesSFO on Sun Feb 02, 2014 2:49 am,
edited 1 time in total.
by JamesSFO » Sun Feb 02, 2014 2:46 am
DireWolf wrote:
JamesSFO wrote:
DireWolf wrote:I like the fact that ETFs traditionally have
low fees, but the fee structure can be harder to understand. I also don't
understand ETFs as well as I do mutual funds, so there is some anxiety.
How is the fee structure harder to understand? Each ETF in the offering will have an ER and each mutual fund in your current line up has an ER?
I'm not claiming that you should make the switch but I'm not sure what fee structure you think will be more complex?
The bid-ask spread in particular.
Thanks for clarifying, and I think overall that is reasonable, but if you stick to heavily traded ETFs like say the iShares core holdings in your lineup what do the bid-ask vs. NAV spreads look like? EDIT to fix to an iShares example, ITOT has a bid-ask spread of around 0.05%, but also EDIT to point out, isn't the premium/discount to NAV more relevant? +0.03% premium to NAV btw?
Again, I looked at the iShares ETF lineup and went with the VG signal shares mutual funds for my company, but I think given the processes in place the ETF offering could be quite competitive on expense ratio overall except for degenerate cases where bid-ask comes apart or the the unit redemption mechanism comes apart and the NAV goes to heck.
I think it is totally reasonable to focus on it and pick the mutual fund line up.
This WSJ article has some more info (google ETFs in 401K and it was a top result): http://online.wsj.com/news/articles/SB1 ... 0035464136
Here's a completely ungated article talking about some of the issues: http://www.etf.com/sections/features/20 ... -live.html
by livesoft » Sun Feb 02, 2014 7:42 am
Since many 401(k)s
have funds wrapped in annuities or use collective trusts that folks don't
really understand and cannot look up prices online except at the 401(k)
website, I suppose that ETFs could be just one more of that kind of thing. And
now I see that the price that one would buy/sell at in the 401(k) is some
end-of-day fixed price, I would not have any objections to an ETF-based 401(k)
plan.
Indeed, the 401(k) plan of ETFs would not even have to call them ETFs or even reveal that ETFs were being used. They could invent some new term for them such as CIAs (collective investment annuities) and charge extra fees for all their cleverness.
Indeed, the 401(k) plan of ETFs would not even have to call them ETFs or even reveal that ETFs were being used. They could invent some new term for them such as CIAs (collective investment annuities) and charge extra fees for all their cleverness.
It's all about
short-term opportunistic rebalancing due to a short-term change in one's asset
allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I
mean market timing.
by JamesSFO » Sun Feb 02, 2014 10:14 am
livesoft wrote:Since many 401(k)s have funds wrapped in
annuities or use collective trusts that folks don't really understand and
cannot look up prices online except at the 401(k) website, I suppose that ETFs
could be just one more of that kind of thing. And now I see that the price that
one would buy/sell at in the 401(k) is some end-of-day fixed price, I would not
have any objections to an ETF-based 401(k) plan.
Indeed, the 401(k) plan of ETFs would not even have to call them ETFs or even reveal that ETFs were being used. They could invent some new term for them such as CIAs (collective investment annuities) and charge extra fees for all their cleverness.
Indeed, the 401(k) plan of ETFs would not even have to call them ETFs or even reveal that ETFs were being used. They could invent some new term for them such as CIAs (collective investment annuities) and charge extra fees for all their cleverness.
Live - Ever the cynic? TD Ameritrade seems to be doing this to be able to offer smaller plans lower cost options. My guess is they make some $ off the proprietary trading plus acting as a market maker of sorts on fractional shares and/or the marketing $ from the ETF sponsors.
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