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ETF Providers Make A Run for 401(k) Market


In a challenge to one of mutual funds' strongholds, exchange-traded fund providers are targeting defined contribution plans.

Barclays Global Investors' iShares, the largest ETF provider, just launched its iShares in 401(k) Program with the goal of helping financial advisers use the funds as standard options in retirement plans.

The program identifies administrators that offer "competitively priced and straightforward access to ETFs in 401(k) accounts," according to Barclays.

"Our goal is to make iShares available broadly, with more than 100 choices" of administrators, said Darek Wojnar, head of iShares product research and strategy at Barclays Global Investors.

A Barclays spokeswoman said the initiative will not be affected by the iShare unit's pending acquisition by the private-equity firm CVC Capital Partners Group.

Rick Meigs, president of 401khelpcenter.com LLC, a research and consulting firm in Portland, Ore., said that even though exchange-traded funds have been around since the early 1990s, they still represent just a niche in the 401(k) world.

Nevertheless, "it's been growing over time," he said. "There are a number of vendors over the last four or five years who have made a reasonably successful business running ETF-only 401(k) platforms."

ING Direct is one of the higher-profile companies using the funds in 401(k) plans. The ING Group NV subsidiary has made about 2,000 plans available through its Web-based Share Builder 401k product.

Unlike ING Direct's product, the iShares program allows exchange-traded funds to be used exclusively or alongside mutual funds.

Until a few years ago, exchange-traded funds were not a practical tool for retirement investors; since they could only be traded like stocks, each individual buy or sell entailed its own fee. "That drove transaction costs through the roof," Meigs said.

Current technology allows exchange-traded funds to be traded in aggregate within a group plan. Also, more minor wrinkles have been ironed out, according to Barclays. For instance, fractional shares of ETFs can now be bought, so 401(k) investors who want to be fully invested at all times can be.

Pat Burke, a senior vice president at First Niagara Financial Group, in Lockport, N.Y., said offering ETFs-and low-cost index mutual funds-"makes good sense if you are a plan fiduciary or trustee and you are focusing on driving down your investment and trading costs and capturing market returns." First Niagara's benefits consulting unit started using exchange-traded funds in the retirement plans it manages about five years ago, he said.

Meigs said that since mutual funds have become so synonymous with 401(k) plans, ETFs probably will not make fast gains unless the mutual fund companies suffer a public relations setback of some sort.

"If the mutual fund industry makes any kind of major stumble, ETFs as an asset type are going to benefit immediately," he said. "Until they do that, they're probably going to be a niche player."

Mutual funds' biggest vulnerability is their higher-cost structure, Meigs said, and they have come under criticism for hidden fees.

Wojnar said that iShares' average expense ratio is 41 basis points. He said actively managed mutual funds tend to have a ratio of 150 basis points, though many index-based funds are competitive with iShares in terms of costs.

Barclays is targeting its program at advisers who work at registered investment advisers, wirehouses, regional banks and independent brokers. Those intermediaries handle most of the 401(k) plans below $50 million of assets, Wojnar said.

"Advisers have been consistently asking for [ETFs built for 401(k)s] over the past several years," he said.

The program helps advisers find administrators that can deliver exchange-traded funds effectively, Wojnar said. It has been difficult to find such administrators, he said, because the 401(k) recordkeeping and administration world is fragmented among thousands of firms, many of whom use proprietary technology.

Barclays' preferred providers are Plan Administrators Inc. in De Pere, Wis., and Ascensus Inc. in Dresher, Pa. Its preferred network is Mid Atlantic Financial Platforms Inc. in Pittsburgh. Barclays seeks administrators that offer fully bundled ETF 401(k) products and services, along with custodians and technology providers that enable all the administrators on their network to offer such plans. Barclays said it plans to add more of both in the future.

Another new entrant is the Buffalo administrator P&A Group, which announced May 1 that it had developed a program that lets defined contribution plans buy and sell exchange-traded funds.

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