ETF giant launches 401(k) plan invasion

PHILADELPHIA — With help from Barclays Global Investors, a California 401(k) record keeper has created a new platform intended to break the mutual fund stranglehold on the 401(k) market. BenefitStreet Inc. announced the launch of its platform last week after development work with Barclays that spanned “many months,” said Jim Drury, chief executive of the San Ramon-based provider. The platform initially will offer iShares ETFs from Barclays exclusively, but ETFs from other providers eventually will be added, he said. San Francisco-based Barclays couldn’t be happier. “This is a breakthrough in the delivery of iShares funds to the sizable 401(k) U.S. market at a time when transparency and low total cost are critically important to plan sponsors and advisers,” Michael Latham, managing director and head of iShares in North America, said in a statement. According to Mr. Drury, the breakthrough in the BenefitStreet platform is that it allows retirement plan participants to own ETFs directly without incurring huge trading costs. BenefitStreet places trades at the fund level, leveraging its technology to minimize commission costs across its platform. The aggregation of trades is important, because trading costs have been a major obstacle to ETF growth in retirement plans, where contributions and investments typically are made each pay period. This frequency gives open-end mutual funds an edge, because they easily can accommodate periodic inflows at low cost to investors. By contrast, each purchase of ETF shares, which trade like stocks, typically bears a commission charge. Other providers also are grappling with the transaction cost issue. Invest n Retire LLC of Portland, Ore., offers a solution similar to that of BenefitStreet which also leverages technology to allow plan participants to own ETFs directly without incurring much in the way of trading costs. XTF Advisors LLC, a New York subsidiary of XTF LP, has developed mutual funds and separately managed accounts that invest in ETFs and can be included in retirement plans. AST Trust Co. of Portland, Ore., a division of American Stock Transfer and Trust Co., offers retirement plan collective trusts that invest in ETFs. But Mr. Drury contends that indirect solutions are problematic, because including ETFs in a mutual fund or collective trust detracts from the product’s inherent advantages, which are low costs and transparency. Whatever the solution, ETFs confront a defined contribution marketplace where mutual funds enjoy overwhelming dominance. Today, ETFs represent a scant 3% to 5% of the $2.5 trillion 401(k) market, according to industry insiders. But that is likely to change as Barclays and other ETF providers get behind platforms that make ETFs more conducive to retirement plans, said Rick Meigs, president and founder of 401khelpcenter.com LLC in Portland, Ore. As more platforms make ETFs available, he reasons, the more retirement plan sponsors will be inclined to look at ETFs. And more platforms are coming. WisdomTree Investments Inc. of New York is planning to roll out an ETF retirement platform later this year that likely will resemble the platforms from BenefitStreet and Invest n Retire.