Exchange-traded funds are slowly making their way into 401(k) offerings, according to a new report from BrightScope, a firm that evaluates 401(k) plans. ETFs are still a very small presence in the huge retirement-fund business. But Brightscope predicted dramatic growth for the low-fee funds in retirement plans as it released its first list of the 20 ETFs most prevalent in 401(k) plans. ETFs from Vanguard and iShares, a unit of Black Rock, dominate the group.
ETFs have become increasingly popular among investors. Like index mutual funds, ETFs tend to be passively managed funds that track major market indexes. Both ETFs and index funds have very low fees, and ETFs also are favored by many active investors because they can be bought and sold like stocks throughout the trading day. Index mutual funds, by contrast, can only be bought or sold once each trading day after markets have closed.
"ETFs are off to a slow start in terms of their distribution in 401(k) plans but we expect their prevalence to grow dramatically in the future as plan sponsors begin to understand the benefits of including them on plan menus," Mike Alfred, co-founder and CEO of BrightScope, said in a prepared statement.
At the end of 2009, 401(k) plans had nearly $2.7 billion in ETFs, according to BrightScope. That number was up sharply from a year earlier. But it amounts to little more than a rounding error, compared with the more than $4.5 trillion held in 401(k)s and other defined-contribution plans at the end of 2010, according to data from the Investment Company Institute.
[See the top-rated T. Rowe Price funds from U.S. News.]
And while BrightScope tracks nearly 50,000 401(k) plans, very few offer ETFs to participants. According to the company, here are the top five ETFs in 401(k)s, their ticker symbols, dollars invested, number of plans, and share of total ETF dollars in all plans.
1. Vanguard Total Bond Market (BND): $247.7 million, 65 plans, and 9.2 percent market share
2. iShares Russell 1000 Growth Index (IWF): $123.7 million, 65 plans, and 4.6 percent market share
3. Vanguard Small Cap Growth (VBK): $100.3 million, 41 plans, and 3.7 percent market share
4. iShares Russell 2000 Index (IWM): $99.6 million, 76 plans, and 3.7 percent market share
5. iShares Russell 1000 Value Index (IWD): $96.3 million, 64 plans, and 3.6 percent market share
The predictions for big ETF growth in 401(k) plans stem primarily from their low investment management fees, which frequently total less than 0.15 percent. By contrast, BrightScope said, mutual fund net expense ratios range from 1.3 to 6 times higher for comparable types of investments.
Cutting 401(k) fees can have a big impact on how much money people save in their plan. According to a 2009 U.S. Government Accountability Office report on 401(k) fees, paying an extra percentage point in annual fees would shave a sixth off accumulated retirement savings after 20 years.
In addition, passively managed investment funds that try to match overall market movements have proven to be more successful than many actively managed funds that charge higher fees but don't perform as well.
Financial measurement firm Dalbar recently reported that for the 1990-2010 period, equity investors earned 3.83 percent and asset allocation fund investors earned 2.56 percent, compared with a 9.14 percent gain for the S&P 500 (all returns are on an annualized basis). Fixed-income investors earned 1.01 percent, compared with the Barclays Aggregate Bond Index return of 6.89 percent.
Here are the remaining top 15 most popular ETFs in 401(k) plans, as listed by BrightScope:
6. iShares Russell Midcap Value Index (symbol: IWS)
7. Vanguard Small Cap (VB)
8. iShares MSCI Emerging Markets Index (EEM)
9. Vanguard Growth (VUG)
10. iShares MSCI EAFE Index (EFA)
11. Vanguard Intermediate-Term Bond (BIV)
12. Ultra QQQ ProShares (QLD)
13. SPDR S&P 500 (SPY)
14. iShares Russell 2000 Growth Index (IWO)
15. SPDR Gold Shares (GLD)
16. iShares Russell 2000 Value Index (IWN)
17. iShares Barclays 7-10 Year Treasury (IEF)
18. iShares Barclays 1-3 Year Treasury Bond (SHY)
19. Vanguard Mid Cap (VO)
20. Vanguard Small Cap Value (VBR)