If you sit back and think about it, how do we, as advisors (or for that matter any small business owner) make it?  Look at this partial list of taxes and fees we pay for in our business and personal lives; federal income taxes, state income taxes, sales tax, Social Security, Medicare, state and federal unemployment, and finally, incorporation and professional fees. 

Doesn’t this kind of, sort of, remind you of the 401(k) industry?  As a retirement plan advisor, you get the laborious job of sorting out operating expenses, SubTA fees, SSA fees, 12b-1, front-end charges, contingent-deferred sales charges, participant fees, transfer fees, asset-based fees, administrative fees and 5500 tax filing charges.   

But it doesn’t end with just fees.  There are Investment Policy Statement (IPS) concerns that must be addressed with the Plan Sponsor.  Quoting from Rob Arnott’s, Rafi Fundamentals April 2009 newsletter; “Indeed, during February, 15 of the 16 major markets that we track in our Global TAA work fell; the equally weighted portfolio fell nearly 5%. How often had that happened before? Never… until 2008. This unprecedented event—15 out of 16 asset classes falling with a –5% average in a single month—happened for the first time ever in September 2008.  And repeated in October and again in February—thrice in a six month span.”

So, the markets have experienced an unprecedented event.  Plan participants have started calling you the 201(k) guy instead of the 401(k) guy. Now you are picking up the phone to call the plan’s Trustee to schedule the annual review.  I’m sure you can’t wait to talk about the “unprecedented events.” Would you dare to bring up a mutual fund trading scandal, an operating expense increase, a fund manager change, inferior performance vs. the benchmark (an index), short-term trading fees, and finally hidden SubTA or SSA fees that you just found out your recordkeeper is keeping?

Use ETFs as the investment choice!  All of the nasty stuff mentioned above doesn’t exit in the ETF world.  An ETF closely replicates an index.  No fund manger personnel changes to worry about, no market timing issues, no short-term trading fees, and very few active managers consistently beat “the index.”

Plan participants can have a consistent style box investment choice.  If they want a small cap fund, they get a true small cap choice with an index-period. Buy into an emerging market country, and then sell out after you’ve made a profit.  If you sold an emerging market mutual fund, you probably would lose a good percentage of your profits due to a short-term trading fee.  This doesn’t happen with an ETF.

What about that balanced fund that most of the participants in your plans have used?  How much did it go down, 20 percent, 30 percent or 40 percent?  I’m sure you were shocked when you found out the “fixed income” component wasn’t really investment grade bonds, but mortgage backed securities.  Use ETFs to build your own models.  iShares Aggregate Bond Index (AGG) or TIPs (TIP) product isn’t loaded down with mortgage backs.           

It’s not the low operating expense ratio of ETFs; it is the consistency and, most importantly, the ability to make an advisor’s life a lot easier.  The future is here; check out Barclays iShares 401(k) website, www.ishares401k.com.