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Innovative Tool, New Possibilities:
How Advisors are Using ETFs
in 401(k) Plans
More and more, financial
professionals are coming to appreciate the value that
exchange traded funds (ETFs) can bring to their clients’
401(k) plans. With their cost efficiency, transparency,
and availability across virtually every global asset
class, it’s not difficult to see why ETFs are making
inroads into a marketplace long-dominated by actively
managed products. So how are advisors using them in
practice?
Enhancing the
lineup
Perhaps the easiest way for
financial professionals to incorporate ETFs into their
401(k) offerings is to use them in a plan’s lineup of
standard investment options. By introducing ETFs
alongside traditional, actively managed funds, you can:
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Replace
underperforming active actively managed products
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Augment
the menu of investment options with alternative
exposures like commodities or high yield bonds
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Help the
plan sponsor contain costs
When it comes
to participant education, explaining the value of ETFs’
instant diversification, reliable asset class
representation, and relatively low expenses is arguably
easier than trying to convince them that a particular
active manager’s past performance is truly
not indicative
of future results. And by shifting the conversation away
from individual fund performance and toward the
importance of having the right asset mix, advisors have
a real chance of helping participants make better
decisions—and potentially achieve better investment
results.
Building better
models
Many advisors are starting to offer
customized, managed models in lieu of off-the-shelf QDIA
options. For these advisors, ETFs are playing an
increasingly important role. Using ETFs in these model
portfolios allows you to:
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Add more
index-based exposures into your model, since
historically, passive options were limited
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Differentiate your offering through the fee
compression made possible by low ETF expenses
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Help
participants seek better investment outcomes by
using style-pure building blocks to execute on your
asset allocation models
In addition, because ETF holdings
are generally published daily, advisors can see (and
therefore manage) any overlaps across funds that might
compromise the integrity of a participant’s asset
allocation.
In essence, ETFs are providing
financial professionals with innovative tools to execute
on managed models. The managed model approach, more
generally, affords advisors greater opportunities to
differentiate themselves, and to serve up a truly unique
offering. Many advisors are pairing this approach with
becoming 3(38) investment fiduciaries, further expanding
the ways in which they can add value to the client
relationship.
How will you use
them?
The question of ETF adoption in the 401(k) marketplace
is no longer a question of “if”, or “when”, but “how?”
Advisors are already sorting this out and finding that
ETFs’ flexibility means there are many answers to this
question. As the industry continues to move in the direction of greater
transparency and cost control, ETFs will play an
important role. And so will the forward-thinking
advisors who are already using them.
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