The Street

Ross Kenneth Urken

October 27, 2017

Among pooled investment vehicles, ETFs are the relative newcomer but have quickly become a favorite among individual investors seeking low-cost, tax-efficient access to a wide variety of asset classes. Between January and August 2017, ETFs took in almost $300 billion.

Despite their popularity, they are vastly underutilized in workplace retirement plans.

According to the Investment Company Institute, mutual funds account for more than two-thirds of the $5 trillion in assets held in employer-sponsored 401(k) plans, with ETFs making up only a fraction of the remaining third.

To shed light on this issue, TheStreet, the online publishing platform founded by Jim Cramer, turned to Kip Meadows, CEO of Nottingham, for expert insight into why 401(k) participants may benefit from utilizing ETFs versus mutual funds for their retirement savings.

According to Kip, the primary benefit ETFs offer over other pooled investment funds comes down to trading. Purchasing ETFs is virtually identical to purchasing any common stock on a listed exchange, and can be done through any broker dealer as a share purchase. On the other hand, options to purchase mutual funds can be limited because most major brokerage firms charge a fee for mutual funds to access their platform. These fees keep mutual fund expense ratios high, and make some mutual fund families unavailable.

Conversely, ETFs offer exposure to a diverse selection of investment markets and asset classes, and tend to have a lower expense ratio than open-end mutual funds. This makes them an attractive option for retirement plan participants, and the lack of penetration in this space could represent an area of opportunity and untapped potential for fund sponsors thinking about breaking into the ETF landscape.

“All other things being equal, almost any ETF has an opportunity to outperform a comparable mutual fund of similar style, simply due to a lower expense ratio,” Kip is quoted as saying in the article.

To read the full article in TheStreet, click here.