Gillam points out that Schwab’s ETF asset class exposure is
more specific than broader categories—for example, it offers particular asset
classes within U.S. equities such as large cap, small cap and real estate.
Internationally, the funds offer emerging market, as well as broad,
Schwab’s glide path is also something the investment company
believes adds value. “We don’t just move to a stock-to-bond mix over time, but,
within each asset class, we move to lower-risk investments,” Gilliam says. “We
are able to do so at a low cost.” He adds that providing ETFs in TDFs is a way
to employ the power of the value of ETFs in a format familiar to defined
contribution plan advisers and sponsors.
However, McCabe says, whether using exchange-traded funds in
TDFs benefits shareholders depends on the TDF provider. “Our institutional,
zero-revenue-share TDFs come in at 29 bps—which includes the cost of underlying
ETFs and CITs—but different share classes have different costs, so ETFs don’t necessarily
reduce costs,” he notes.
Still, McCabe says, advisers should consider TDFs with
underlying ETF investments because they are able to access different areas of
the market very inexpensively and they have no individual security risk—like
investing, for example, in Coca-Cola. “I think we will see more and more
managers using ETFs in TDFs because of the cost advantages,” he concludes.
Gilliam says an adviser’s first conversation with a DC plan
sponsor client about using TDFs with underlying ETF investments should discuss
active vs. passive management. “Industrywide, plan sponsors want costs down,”
he says. “Going to a passive solution using ETFs allows efficient exposure to
broad asset classes and lower costs.”
The desire to reduce investment costs has been driven by the
increase in defined contribution plan excessive fee suits over the past decade
or so. The lawsuits have been increasing since the Department of Labor (DOL)
issued fee disclosure regulations in 2012.
But, Cirillo says, “keep in mind, ETFs are still a very
small percentage of TDF assets overall. Unless some of the larger players
decide to utilize ETFs in some of their series, it’s going to be a long road
ahead for ETFs in this market.”
- ETFs have not gained traction in defined contribution
plans because their intraday trading is incompatible with most recordkeeping
- However, a handful of TDFs, mostly new entrants and
smaller managers, are investing in ETFs to lower costs.
- TDFs using ETFs are also looking for specific asset
classes within categories.
Target-Date Fund Managers Utilizing Exchange-Traded Funds
The 17 Target-Date Fund Families Using Exchange-Traded Funds
- Allianz Global Investors
- Franklin Templeton
- Goldman Sachs
- John Hancock Investments
- JPMorgan Funds
- MainStay Funds
- Nationwide Funds
- PNC Capital
- State Farm
- State Street Global Investors
- Voya Investment Management
- Wells Fargo
Source: Strategic Insight. Data only pulled for those providers for which ETFs were in the top 10 holdings of their TDFs.