Exchange-traded funds showing up in 401(k) offerings

June 28, 2011

| Money Rates Columnist

Exchange-traded funds, low-fee funds that are becoming popular investments, have been making their way into 401(k) retirement savings accounts.

ETFs are like index mutual funds in that they can be passively managed to track major market indexes. But unlike index funds, they can be bought and sold like stocks throughout the day, rather than at the end of the day after markets shut down.

The arrival of ETFs are good news for those using 401(k) to build their retirement savings accounts and are concerned about high fees and expenses related to those accounts.

Hidden costs of 401(k) plans

According to National Public Radio, the hidden expenses in 401(k) savings accounts can be as much as $1,500 annually for a 401(k) with a $100,000 balance. That's why some investors choose instead to put money into money market accounts or certificates of deposits. Even though the interest rates for the best cd rates and best savings accounts are at a historic low, they are relatively risk-free investments.

Although federal law requires that 401(k) fees must be "reasonable," NPR noted that many investors don't have a point of reference to help them determine if their fees are high.

The New York Times finance columnist Ron Lieber told NPR that those fees should be less than 1 percent but some are as high as 1.5 percent.

New 401(k) disclosures

Starting in January 2012, the Labor Department will require employers fully disclose the fees charged to 401(k) savings accounts. According to NPR, this will make it easier for the 72 million Americans with 401(k) savings plans to compare investment options.

The new rules will also require that the plans provide more detail about the performance of various mutual funds offered as investments.

Among those funds will be an increasing number of the ETFs. According to USNews.com, 401(k) plans had $2.7 billion in ETFs at the end of 2009, still a small fraction of the $4.5 trillion in 401(k)s and other defined contribution plans.

But the ETFs are appealing in that their management fees typically are less than 0.15 percent. This, USNews.com noted, could have a big impact on how much people can keep in their savings accounts; paying an extra percentage point in fees cuts a sixth of total retirement savings in 20 years.

USNews.com also noted that passively managed funds, like ETFs, have been more successful than many actively managed funds that charge much higher fees.

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