My current employer is radically revamping its 401K plan. I have noticed that companies tweak their 401K plans about annually, and dramatically change them every 5-7 years. This time it’s big. One of the choices allows for both ETF and mutual funds purchases. The EFT option has me excited.
So far in my career I have worked for three Fortune 500 technology companies. Long story short, I have two 401Ks and a couple IRAs. Between them I have about 8% invested in ETFs and the rest in mutual funds. After the 401K redux, I’ll likely have about 30/70 ETF to mutual fund mix. I’ll keep my asset allocation largely the same, but I’ll work out a bit of math here and there to do so. Some mutual funds stay, some funds go, some switch to higher expense-ratio versions, and some are frozen from new money after a certain date. Over time my retirement assets may approach a 50/50 ETF-to-mutual-fund ratio.
A similar 401K change may be coming your way soon. The booming ETF trend is continuing unabated with over $1 trillion dollars in assets under management in 2010; some predict that doubling by 2015. Why? 1) Institutional investors like ETFs, 2) retail investors like ETFs, 3) exchanges like ETFs, 4) brokerages like ETFs. Generally for the same reason: lower costs.
The upside of more options is access to better options and greater potential for diversification. The downside is trading fees for ETFs… $7.95 under the new 401K paradigm. Wise, infrequent purchases can mitigate trading costs. This requires a bit of financial planning, but is not really a big deal for serious investors. And there are ~25 ETFs that trade for free. One can invest in them every paycheck (like buying EEM for free) then periodically, every 6 months or one year, bite the bullet to sell EEM (for free) and buy the better ETF VEU. Brilliant — low fees and true dollar-cost averaging. [Not my idea, but a good one.]
In summary, fear not the change to more ETF-centric investing. Your particular company may pull a fast one on you… but in many cases not. Read ALL the fine print before determining the case. I’m glad I did, and I sense greater investing opportunity.
Balhiser.com 