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WisdomTree DC Platform Handles Both ETFs and Mutual Funds: Industry's Early Attempts at ETF-Only Plans Met Resistance


WisdomTree Retirement Services, a unit of WisdomTree Investments of New York, is the latest firm to launch a platform designed for the 401(k) market that offers plan sponsors a combination of ETFs and mutual funds, or a selection of all ETFs combined into preset portfolios.

WisdsomTree's new platform has two offerings, one where a 401(k) sponsor can select all-ETF funds from a model plan and another where they can work with a financial adviser to customize the funds in their plan to include whichever mutual funds or ETFs of their own choosing.

The model plan includes six ETF-only portfolios, three of them target-date ETFs (2015, 2025 and 2035) and conservative, moderate and aggressive funds. These funds include 11 of WisdomTree's proprietary, fundamentally based ETFs, two Vanguard fixed-income ETFs and two Barclays Global iShares ETFs in varying proportions.

The job of determining the appropriate asset allocations for each of the ETF-rich six portfolios is outsourced to CLS Investment Firm, an Omaha, Neb.-based SEC-registered investment advisory firm that, consequently, assumes the plan's fiduciary role.

Plan administration, recordkeeping and custody services for the plans WisdomTree signs up have been delegated to Professional Capital Services of Philadelphia. All ETF trades are traded on an omnibus basis through ICTC/Ameritrade.

While the platform was built to accommodate no-load mutual funds that lack 12b-1 fees, the technology can accept other mutual funds that 401(k) plan sponsors simply cannot live without, said Al Shemtob, director of retirement services at WisdomTree.

"ETFs represent a cleaner, low-cost, fee-transparent vehicle, but people are loyal to their active mutual funds," he said. "If a plan needs to keep its 12b-1 mutual funds, the platform, technologically speaking, can do that."

Shemtob, who had previously served as the president of BISYS Retirement Services unit until this past April, sees WisdomTree's sweet spot as the $2 million to $50 million plan market where a financial adviser plays a key role. The challenge going forward is to get sponsors "to realize that these [ETFs] are just like the [mutual fund retirement] platforms they are comfortable with," he said. To that end, WisdomTree has hired four initial regional retirement directors to market the two 401(k) plan models to advisers.

The push to incorporate ETFs in 401(k) menus and even adopt an all-ETF program is being driven by both the industry and the government, Shemtob noted. The popularity of ETFs, along with efforts to provide fuller plan fee disclosure and, under the Pension Protection Act of 2006, more choices, are pushing ETFs into the limelight, Shemtob said.

Invest n Retire, a financial services and technology firm in Portland, Ore., believes it was the first firm to offer ETFs within a 401(k) plan back in September 2003. It later rolled out a formal platform to include ETFs within 401(k) plans in January 2006.

But Invest n Retire's entire 401(k) platform has changed drastically since the early days when it sought to reduce the costs associated with ETF transactions by netting out the trades to various ETFs each day.

Since then, the firm has spent close to $10 million to build a better mousetrap and in the process transformed itself from a financial services firm into a bona fide technology solutions provider that offers a state-of-the-art platform for 401(k) sponsors to embrace ETFs, said Darwin Abrahamson, CEO of Invest n Retire. It is now first seeing requests for ETF-only 401(k) plans.

Unlike WisdomTree, which outsources some plan functions, Invest n Retire provides recordkeeping and now handles the trading of individual ETF shares on behalf of plan participants itself through contracts it inked directly with the stock exchanges, Abrahamson said.

The challenge to incorporating ETFs into defined contribution plans was that the industry's 401(k) software was built to cater to mutual funds, Abrahamson said. It just couldn't understand the nuances of ETFs, such as share trades, versus funds' dollars and net asset values. Big firms were getting around that by using self-directed brokerage accounts, while banks were forming collective trusts that added layers of costs, while others used managed accounts that provided synthetic net asset values at the end of the day and were both expensive and opaque.

"We learned that the only way it would ever work was to develop our own technology," Abrahamson said. Invest n Retire filed for a patent for its platform in 2004 and has been amending it ever since. The firm is now looking to leverage that platform technology into the less competitive 403(b) and 457 plan markets, as well as for executives' non-qualified deferred compensation plans.

A third firm, BenefitStreet of San Ramon, Calif., a corporate benefits firm, debuted its 401(k) platform last month. Like WisdomTree, BenefitStreet's platform allows sponsors to offer both ETFs and mutual funds.

Early attempts to provide an ETF-only 401(k) met resistance, noted the firm's executives. BenefitStreet's DC platform allows for plan sponsors and independent advisers to incorporate index-tracking ETFs, actively managed mutual funds and index mutual funds, including those from Barclays.

The firm has received 250 new adviser inquiries and is conducting a series of cross-country educational seminars for advisers planning to offer ETFs, said Jim Drury, CEO of BenefitStreet.

Today's platform design allows participants to invest in the mutual funds they know but also embrace ETFs that they've been investing in through their IRA plans and brokerage accounts, so why not in their 401(k)s, Drury noted.

Additionally, the new trading technology has reduced the cost for ETF trades to pennies per trade or even less than a penny, both Drury and Invest n Retire's Abrahamson noted.

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