Exchange Traded Funds in Retirement Plans
Over the last several years exchange traded funds (or ETFs) have become very popular among investors because of their lack of a minimum investment, their low cost of ownership and their ability to be intra-day traded.
Most ETFs track an index such as the S&P 500, but unlike an index mutual fund, ETFs can be bought and sold just like a stock. That means that they can be bought or sold at any time during normal trading hours while mutual funds trade just once a day, at the end of a trading session.
While retail investors enjoy the trading flexibility of ETFs, retirement investors do not receive this same advantage. Participant trades within a retirement plan must be executed at the same time to avoid discrimination. As such, intra-day trading flexibility is lost within a retirement plan.
An attractive benefit of ETFs is their low cost. Most ETFs are passively managed and therefore, relative to actively managed mutual funds, they appear inexpensive. However, when compared to similar passively managed mutual funds, the cost difference between the two is negligible.
Another drawback of ETFs in a retirement plan is that they do not contain the ability to revenue share to help offset plan recordkeeping costs. In a mutual fund, recordkeeping costs can be built into the fund to help pay plan expenses. If a retirement plan was to offer ETFs, it would have to find an alternative method if there was a need to offset plan expenses.
ETFs have gained notoriety over the last several years for their low cost and ability to trade intra-day however they are far less common and less advantageous in retirement plans because the benefits are diluted in the defined contribution world.