The financial crisis and market meltdown showed many workers just how unhappy they were with their retirement savings plans at work. Burdened with the responsibility of trying to put together a decent investing strategy with high-cost, low-performance investments, some workers have just given up on the idea of using a work-sponsored 401(k) plan to build a retirement nest egg.
But amid greater competition in the brokerage space, one company is trying to change that. Rather than forcing 401(k) investors to choose from subpar mutual fund offerings, you may soon have the ability to pick from among popular exchange-traded funds at a much lower cost.
ETFs and your retirement
Given the explosion in popularity of ETFs in recent years, the surprising thing is why it has taken so long to find ETFs in 401(k) plans. But in order to use ETFs, TD AMERITRADE had to tackle a host of legal and technical challenges, including allowing trading of fractional ETF shares and ensuring that trades would settle in a single day rather than the typical three-day process that usually governs ETF trades on stock exchanges.
A winning trade
The move may seem like a no-brainer, but it also highlights the competition to grab and maintain retirement-plan accounts. With $2.9 trillion in retirement plan assets, broker-administrators like TD AMERITRADE have every incentive to try to attract new employer plans.
At the same time, the company also has to fend off new challengers to the business. On one hand, with roughly 4,000 qualified business retirement plans under its belt, TD AMERITRADE doesn't come close to the level of industry leaders Fidelity, Aon's
Indeed, TD AMERITRADE isn't the first to turn to ETFs for retirement plans. ING's
How to handle ETFs
The key element for companies seeking to offer ETFs in 401(k) plans will be getting a handle on how to educate their workers to use them properly. In all likelihood, that means that you shouldn't expect to get a wide range of sector-specific ETFs that let you tailor your retirement portfolio to your exact specifications. Rather, what you're most likely to see are broad-market index ETFs with highly diversified portfolios -- the sort of ETFs that could take the place of similar index mutual funds without making a big splash among investors.
If you get ETF options in your 401(k) plan, keep in mind that first and foremost, we're still talking about your retirement money here. For investors with long time horizons, you'll want to invest that money aggressively to give it the best chance to grow. Whether a broad stock market ETF is the best way to get that exposure depends on the other investment options you have available. But if a stock ETF is present in your plan, it's definitely worth taking a look at it to see whether it might be your best choice.
With pressure to differentiate itself from E*TRADE Financial
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Fool contributor Dan Caplinger has the 401(k) he always wanted. He doesn't own shares of the companies mentioned in this article. BlackRock is a Motley Fool Inside Value pick. The Fool owns shares of Aon, Bank of America, JPMorgan Chase, and Wells Fargo; and through a separate account in its Rising Star portfolio also has a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy knows what you want.