Banking

February 8, 2014

Latest 401(k) wrinkle: plans built around ETFs

Be the market. Minimize costs.

Be the market. Minimize costs.

It sounds like a Zen saying, but it’s also an investing strategy that more of us are adopting. Every month, billions of dollars flow into mutual funds and exchange-traded funds that simply track a market index rather than try to beat it. Demand is so strong for the lower costs of index funds that it’s pushing the industry to alter its offerings. The latest shift: 401(k) plans built entirely around ETFs, rather than traditional mutual funds.

Charles Schwab launched an all-ETF 401(k) offering last week and says it expects several employers to begin offering the program to their workers later this year.

Unlike CDOs, LBOs or EBITDA, ETFs are similar to something with which most investors are familiar: traditional mutual funds. Like them, an ETF offers an easy way to own a wide basket of stocks, bonds or commodities.

Owning a share of the SPDR S&P 500 ETF (SPY), for example, is like owning the entire Standard & Poor’s 500 index, from Abbott Laboratories to Zoetis. The Vanguard Total Bond Market ETF (BND) tracks an index that covers thousands of bonds from Treasurys to mortgage-backed securities.

Interest in ETFs has boomed in recent years. They had a total of $1.67 trillion in assets at the end of December – up elevenfold from a decade earlier, according to the Investment Company Institute.

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