Sunday Musings: An All ETF 401k

It had to happen eventually. A major player would offer an all ETF 401k plan. While only very few custodians have ventured into that arena, Charles Schwab & Co. has announced that they are up to the task as well, as ETF Trends recently reported:

This news should cheer investors who want to see a wider array of all-exchange traded fund (ETF) 401(k) plans on the market: discount brokerage and ETF provider Charles Schwab is getting in on the action.

Schwab President and CEO Walter W. Bettinger II told a group of advisors recently that the firm has been hard at work on the launch of an all-ETF 401(k) plan in early 2012, says Lisa Shidler at RIABiz.

In keeping with Schwab’s low-cost ethos, its plan would save participants between 35% and 85% off a mid-sized plan, Bettinger said.

Schwab isn’t the first-mover in this growing space, but when the plan launches, it will be the biggest player by a long shot.

The move is huge for the ETF industry, which has been trying (and slowly succeeding) in cracking this market. There’s an estimated $3 trillion in 401(k) assets, and naturally, the ETF industry would like a bigger chunk of that.

The fear among naysayers has been that some 401(k) investors would trade all day, every day, but some employers may opt to limit such active trading if they add the plan to their rosters.

Schwab’s 401(k) plan is timely, since Congress has been closely eying the fees and expenses that mutual fund-based 401(k) plans charge. If Schwab can introduce a plan that saves people serious money, combined with the fact that ETF commissions are shrinking fast, the industry could be looking at moving well beyond its current $1 trillion in assets.

To me, it is not the old battle as to whether ETFs are a better investment than mutual funds. What it comes down is lower cost and less trading restrictions. Especially the latter has been a thorn in my eye for a long time.

I manage a few 401ks for clients, and the hoops I have to jump through to be sure I don’t rub the custodian the wrong way by making one too many portfolio adjustments are simply ridiculous and out of touch with reality.

I welcome this development and hope that other custodians will follow suit. After all, you as the plan participant are the one who stands to gain the most; and that’s what matters.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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