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Rekenthaler Report

Make Way, Mutual Funds!

ETFs look to crash the 401(k) party

The ETF Advantage?
IndexUniverse carries an article (originally from the paywalled site ETF Report) entitled “Has Schwab Cracked [the] 401k Code For ETFs?” It's an intriguing question. Exchange-traded funds have thus far barely appeared in 401(k) plans. ETFs can't be offered to 401(k)s without being connected to a record-keeper, and they weren't built to be sold in fractional shares, which are necessary to accommodate varying employee balances. Obviously, though, ETFs are very much a force to be reckoned with. They've socked conventional mutual funds in the mouth in the retail marketplace, and they might well do so with 401(k) plans, too.

That's what Schwab(1) claims. There's a certain logic to Schwab teaming up with ETFs, as Schwab is also a low-cost, retail powerhouse that is not a 401(k) market leader. However, I can't say that I'm terribly convinced by the company's argument. Assuming that the operational challenge of fractional shares is resolved--which Schwab claims is the case--then ETFs are no worse than similarly priced mutual funds. But neither are they better.