investment-oriented | PLANADVISER November/December 2016

ETFs Find DC Entry via TDFs

By Rebecca Moore | November/December 2016

Rather, the use of ETFs is a play by providers, in a down market, to get into the space and capitalize on efficiencies in larger asset classes that have less appeal to active managers, Cirillo says. Consequently, the funds are being used in building core portfolios, with 63% of ETF assets in TDFs distributed across three broad categories: intermediate-term bond, large blend and foreign large blend.

“To a large extent, the focus on these three categories is that, even when using indexed funds, TDFs use these three categories as foundations, or building blocks,” Cirillo says. “Those categories provide fewer advantages with active management than some of the more ancillary categories where there may be fewer efficiencies in the market and a great opportunity to take advantage of active management.”

Why Use ETFs?
Stadion Money Management Senior Vice President and National Sales Manager Tim McCabe, based in Abbotts, Georgia, explains that ETF trading is wrapped inside the target-date fund. At the end of the day, the trustee inputs the trades as a group. “With a standalone ETF, it can’t do that without a wrapper such as a TDF, collective investment trust [CIT] or managed account,” he says. Stadion Money Management uses all exchange-traded funds within a CIT structure for its target-date funds, to keep costs low.

Jake Gilliam, senior multi-asset-class portfolio strategist for Charles Schwab Investment Management in Richfield, Ohio, says its TDF product that employs ETFs is in a mutual fund structure—something defined contribution plan advisers and plan sponsors will recognize well. “Using ETFs within the TDF, we can trade ETFs in a function similar to mutual funds; the way our funds trade and will be priced is the same as [with] mutual funds, priced at the end of the day,” he says. “The portfolio manager’s trading process will follow what [that manager does] on other products. To the participants, it will look and feel like another TDF but with lower costs.”

Gilliam says Schwab’s use of ETFs allows it to provide defined contribution retirement plans with a fully diversified investment solution as well as lower costs. Its recently launched TDFs offer 8 basis points (bps) with no minimum investment.

“In the long run, [using the funds] helps managers keep costs and expenses down,” Cirillo says. “It benefits long-term returns for participants. Using lower-cost funds for larger asset classes in portfolios drives costs down.”