October 20, 2003
Barclays Offers First ETFs In a 401(k) Savings Plan
Exchange-traded funds, which have quickly become a popular alternative to mutual funds since their debut two years ago, just took another giant step towards developing mass-market appeal: For the first time they are now available through some 401(k) plans.
Internet Investment Education has just added all 81 of Barclays' iShare ETFs to its 401(k) services program. IIE currently offers Barclays Global Investors collective trusts and Dimensional Fund Advisors institutional funds on its 401(k) platform. The company provides 401(k) services to 50 plan sponsors, with a plan size minimum of $1 million, and works with 50 financial advisers. It said its new ETF offering should help it attract more of both.
"A lot of advisers out there are experts as far as investment advising, but a lot have never been in the 401(k) business," said IIE CEO Darwin Abrahamson. "We're putting a lot of advisers in who have never been in the business before. They don't have to be experts in the 401(k) business because we take care all the back-office functions."
Advisers said the low cost of iShares is probably their most attractive feature. Whereas many mutual funds average fees of around 130 basis points, iShares tend to cost as little as 10 to 25 basis points. Meanwhile, total fees, including recordkeeping, custodial and compliance fees, as well as fees charged by advisers (usually 40 to 50 basis points), usually add up to around 100 basis points, Abrahamson said. The average 401(k) plan might charge total fees of up to 200 basis points, he said.
"The cost structure today for most smaller and mid-sized plans is abusive. I think there are plan sponsors out there that should definitely look at this," said registered investment adviser Keith Shadrick, president of Axia Advisory Corp. in Waltham, Mass.
Shadrick said ETFs are best for large-caps and fixed-income assets, but that active management is preferable in the international, small-cap and mid-cap areas of the market. "There are valid reasons to use [ETFs], but in the defined contribution world, comingled, open-end type products where you don't have to pay commission to get in or out of it, are going to be the investment of choice," he said.
There were some technical difficulties that had to be overcome before IIE and Barclays could work together to offer iShares for 401(k) plans. "The problem with using ETFs before, was that everyone out there, as far as custodians go, was requiring ETFs [to be housed in] brokerage accounts, which is a ton of work, and very expensive," Abrahamson said.
Instead, IIE is setting up its 401(k) plans in an omnibus account through custodian TRUSTlynx, which allows IIE to roll all trades in a particular iShare into one trade. That means that commissions of up to $25 on each trade are spread out over 1,000 shares, for example, rather than 100.
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