Investing

Advisers to Push for More ETF Use in DC Plans

With consumers every day becoming more fee conscious and mounting pressure from regulators and litigators, Cerulli finds that advisers “believe that lower-cost investment products translate to less business risk.”

By John Manganaro editors@assetinternational.com | January 27, 2017
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The latest report from Cerulli Associates, “Cerulli Edge – U.S. Monthly Product Trends Edition” for January 2017, shows nearly half of advisers plan to increase exchange-traded fund (ETF) use in preparation for the emerging regulatory environment.

Despite being known as a low-cost investment approach offering access to many different investment classes and styles, ETFs comprise a tiny piece of the total investment made annually via defined contribution (DC) plans. According to data from Cerulli, mutual funds continue to be the most common investment vehicle in 401(k) plans, with collective trusts a distant second. ETFs make up just a small fraction of a percent (0.02%) of the investment vehicles used in 401(k)s.

One reason ETFs have failed to catch on in the DC market is their intraday trading is still incompatible with many defined contribution plan recordkeeping systems, which were built to accommodate mutual funds, or similar investment vehicles. Mutual funds trade once per day and are pooled along with other investors’ trades. ETFs can be traded intraday, have fractional shares and, therefore, are more liquid.

Even facing this hurdle, with consumers every day becoming more fee conscious and mounting pressure from regulators and litigators, Cerulli finds that advisers “believe that lower-cost investment products translate to less business risk.”

“As a result, 45% of advisers plan to increase ETF use and 32% plan to increase allocations to passive investment products in preparation for a new regulatory environment,” Cerulli reports. “The shift to passive reached a new plateau during 2016, witnessing flows of more than $500 billion.”

NEXT: Asset flows for 2016 

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