ETFs and 401(k) Plans - dummies

By Russell Wild

Not many 401(k) retirement plans offer ETFs, but the market is “exploding” according to one industry insider. You’d think that would make lovers of ETFs jump for joy. Maybe not!

The problem with ETFs in 401(k) plans isn’t what you may think. Even though you may be making weekly contributions, the trading fees that you might normally be hit with can easily be overcome in an employee retirement plan. By consolidating all the employees’ trades, the plan sponsor can actually cut trading costs down to almost nothing.

No, the problem is that, many 401(k) plan sponsors are packing their ETFs into nonsensical allocations and slapping on charges (as high as 2 percentage points!) that pretty much negate most of the benefits of ETFs. Why do they do that? Because ETFs are hot, and they make for a good sales presentation, but the plan sponsor may care more about its bottom line than yours.

There are exceptions, however. One company called Invest n Retire, LLC, based in Portland, Oregon puts together ETF-based 401(k) plans with decent allocations and a total cost to the participant of less than 1 percent. Tell your human resources people to contact this company!