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WisdomTree Sees ETFs as Good Fit with 401(k)s


WisdomTree Investments, an exchange-traded fund firm started nine months ago, is gearing up to enter the retirement market. The New York firm has assets of $3.2 billion in its 36 ETFs, and it plans to make the funds available to the 401(k) marketplace shortly, said Al Shemtob, its director of retirement services.

"We want to have the product on the street in the September time frame to capture plans' interest as they prepare to make 401(k) changes for the next calendar year," said Shemtob, who joined WisdomTree late last month after serving as president of BISYS Retirement Services and its predecessor firm for 17 years.

Exchange-traded funds are baskets of stocks that usually track market indexes and can be traded continually on the exchanges that list them. The funds make sense within 401(k)s, the company contends, because their low cost, transparency and flexibility allows investors to create more customized portfolios.

WisdomTree's ETFs would not be the first available through 401(k)s. Invest n Retire of Portland, Ore., a recordkeeping firm, offers funds from several companies through its platform, for instance. And late last month, XTF Advisors, a New York firm that specializes in ETFs, launched nine funds-of-funds that will invest in ETFs, specifically designed for the 401(k) market. The lineup includes three asset-allocation portfolios ranging from conservative to moderate to aggressive; four target-date funds with retirement dates ranging from 2010 to 2040, a country rotation portfolio and a sector rotation portfolio. Although they are designed for 401(k) plans, they will also be available to financial advisers.

"The retirement market is something that can benefit greatly from the low fees, transparency and stability that ETFs offer," said Michael Woods, chief executive officer of XTF.

WisdomTree's indexes and ETFs use an approach called fundamental weighting, which is different from the capital-weighted strategy of some rivals. The approach favors undervalued stocks, a tactic intended to preserve capital.

But the $2.4 trillion 401(k) market remains dominated by mutual funds, in part because of technical challenges that stand in the way of integrating ETFs into the accounts, said Bruce Lavine, the president and chief operating officer of WisdomTree.

One problem is how to limit the trading commission costs associated with ETFs, he said. One solution is to find a trading partner willing to accommodate the company. Lavine and Shemtob declined to reveal the company's solution but said that it would be announced soon.

Denise Valentine, a senior analyst at Celent, a research and consulting firm in Boston, said there is a compelling case for ETFs as part of a 401(k). If WisdomTree "can solve the transaction issue, ETFs in 401(k)s is an extremely attractive" option, Valentine said. One reason, she said, is that they put more power in the hands of the individual. That is different from a mutual fund, where managers may be forced, for example, to sell shares of a promising company to pay for shareholder redemptions.

"ETFs can reflect your own investing expertise. You're not subject to the whims of whomever else is in your funds," Valentine said.

WisdomTree's 20-person sales force is targeting banks and other 401(k) intermediaries, Shemtob said. The company is going after retirement plans with assets of $2 million to $25 million, and banks are a natural fit because they cater to that market, he said.

Close Scrutiny of Fees

WisdomTree's executives are hopeful in part because of recent government scrutiny of fee disclosure in 401(k) plans. Late last month, the Department of Labor's Employee Benefits Security Administration began accepting ideas from the public and the investment management industry on how to improve fee disclosure in 401(k) plans. The deadline for comments is July 24.

But inertia is one obstacle WisdomTree faces in its attempt to crack the retirement market, Valentine said. Plan sponsors are sophisticated enough to see the merit of ETFs, and WisdomTree's vow to provide a low administrative cost structure promises to allay concerns that plan sponsors might have over fiduciary liability, she said.

But ETFs remain relatively uncharted territory in the 401(k) field, Valentine said."This industry, in general strokes, is one that tends to wait and see," she said. Many plan sponsors "do tend to be conservative and will be looking for one or two big names to jump on the wagon."

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