An excerpt from "The 401k Manifesto," which calls for a revolution in the retirement industry, the core of which is an entirely new structure designed around exclusively offering Exchange Traded Funds as investment options. This presents the only truly viable way to enact the type of technological change participants urgently need to build higher average retirement balances on a macro scale.

There is a general structure to the mainstream 401(k) plan; one which has become solidly defined by the limitations of its outdated technology. You will know this as the mutual fund dominated, education laden, manual process driven juggernaut; the variation of which is only slightly measurable between major service providers; but it is heading for a major change.

The investment world is shifting. The era of mutual fund dominance is starting to show measurable signs of approaching dissolution. In the beginning of 1984, mutual funds had no assets in retirement plans. A couple of years later after the completion of the record keeping programming necessary to make mutual funds available in retirement plans, it took little over a decade for mutual funds to become the largest segment of assets in retirement plans (1996).

This sharp rise in asset accumulation within retirement plans paralleled that of conditions for the U.S. market as a whole, which saw steady new cash flows into mutual funds for another decade, until peaking in 2007.1 What followed, for the overall U.S. market, was an exceptionally steep decline in mutual fund assets, with assets flowing out of mutual funds at an ever increasing pace.

Figure 1: Mutual Fund net new assets in billions of dollars.2

Where was all this money going? The answer is into ETFs, which despite the volatile market conditions of 2008, continue to see record setting positive cash flows, indicating that the market was experiencing a committed process of fundamental change.

Figure 2: ETF3 vs. Mutual Fund4 net new assets in billions of dollars.

There is evidence that the momentum of this fundamental change is building. Since 1996, ETF assets have grown nearly 1000%, dwarfing mutual fund asset growth by comparison.

Figure 3: ETF vs. Mutual Fund asset growth rate.5

The result has been a growth in assets for ETFs that increased from around $1 billion in 1996, to $1 trillion at year end 2010.

Figure 4: ETF Asset growth in billions of dollars.6

Finally, this surge in assets in ETFs has been accompanied by a rise in popularity, as indicated by Google® Trends.7Just as 2008 saw the beginning of massive capital outflows from mutual funds, it was also the year that the search volume index for ETFs exceeded that of mutual funds (Fig. 16 Location A), a shift of preference that continues to this day and has been accompanied by a spike in news reference volume as well (Fig. 16 Location B); ETFs are catching headlines and gaining in popularity.

Figure 5: ETF rise in search volume and news reference volume compared to mutual funds.8

The result of all this change has been an ETF asset presence that is approaching 10% of U.S. investment company total assets at year end 2010, a rise of 26% from year end 2009.9 However, in retirement plans, ETFs make up less than 1% of assets, a disparity distanced 10 fold from the mainstream market.10

What can be seen is that mutual funds are losing assets and popularity. The market is heading unquestionably in the direction of ETFs with ever greater momentum and there is no indication that this will change. As a result, it is unrealistic to expect that mutual funds will retain their asset dominance in retirement plans for much longer; the era of ETF retirement plans is coming.

To learn more about the future of retirement plans, read "The 401k Manifesto - The New Standard:"

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