Can ETFs Break Into the $7.4T 401(k) Industry?

ETFs want to help investors save for retirement, too. 

More than 30 asset managers have filed applications with the Securities and Exchange Commission to add multi-share classes to current ETF products that would essentially allow them to act like traditional mutual funds. It’s a Vanguard-inspired strategy that would open the door to retirement plan menus and provide a foothold in America’s lucrative 401(k) industry that invests about $7.4 trillion for millions of savers. 

“The retirement market represents one of the last remaining frontiers,” said Amrita Nandakumar, president of Vident Asset Management. 

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ETFs have been stealing market share from mutual funds for the better part of a decade, but their low costs and tax-efficiency advantages aren’t a huge hit in retirement accounts. Capital gains taxes don’t apply to 401(k)s and the liquidity of ETFs in intra-day trading isn’t a benefit in long-term retirement accounts either. Many legacy systems were also built to handle mutual funds, and they are now being used to manage about half of all retirement assets, according to the Investment Company Institute. The report also found:

• Retirement funds represent close to one-third of US households’ total financial assets as of last year.
• All retirement accounts held $38.4 trillion in 2023, up 12% from the previous year, according to the study. 

Sharing Is Caring. State Street became the latest major institution to get in on the act, filing for permission to create mutual fund share classes that are specifically designed for retirement plans. Schwab applied for the structure in June, following other heavyweights, like Morgan Stanley, Dimensional Fund Advisors, and Fidelity. “If ETF issuers have learned anything over the past 30 years, it is that first mover advantage can mean everything,” Nandakumar said.

Aside from the massive opportunity, 401(k)s can also offer access to new clients. Nandakumar says offering ETFs in 401(k) plans might help State Street reach customers who haven’t heard of the firm before.

Good for Business. If the SEC green lights the applications, those ETFs will essentially mimic a mutual fund and become available in retirement accounts. The wrapper will begin to capture more of the 401(k) plan market, said Sam Adams, CEO of Vert Asset Management. “In tax-deferred accounts, including 401(k) plans, the choice between a mutual fund or ETF is really just packaging,” he said. While there are certainly roadblocks, custodians and fund managers are working together to iron out the process. “It’s really just a matter of time.”