Leaving 401(k) Fees on the Cutting Floor

Pension provider to offer low-cost ETFs to retirement-focused investors

A large pension-plan provider handling some $8 billion in retirement assets is taking aim at costly 401(k) accounts with a move into the exchange-traded fund marketplace.

BenefitStreet Inc. said Tuesday it has struck a deal with Barclays Global Investors to distribute ETFs to corporate sponsors. The San Ramon, Calif.-based firm, which handles record-keeping and many client-support functions, says it currently works with 7,100 different companies.

"ETFs are a huge reduction in costs for employees. If you can buy them in a more pure form through 401(k) plans, they're going to claim a significant portion of the retirement marketplace," said Jim Drury, BenefitStreet's chief executive.

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ETFs, which can be traded at anytime during the day like stocks, have been slow to take off in retirement accounts. Part of that is due to trouble 401(k) record keepers have had with tracking such liquid portfolios. Besides following trading activity, 401(k) sponsors have encountered difficulty tracking brokerage fees tacked onto ETF transactions.

"We're still not at the point where 401(k) participants can handle their own asset allocation strategies with ETFs," said Tom Lydon, publisher of ETFtrends.com, a Web site that tracks the ETF business. "But this is a huge step in the evolution of ETFs as they become a bigger part of corporate retirement plans."

In the past, the industry has tried to overcome ETF back-office issues by forming collective trusts, Drury says. "Those are like group checking accounts for employers," he said. "It created a single entity that existing technologies could handle in the same manner as traditional mutual funds."

The downside, say analysts, is that collective trusts can add a lot of costs to retirement plans.

"We're seeing the heat turned up in the battle for 401(k) money," said Paul Mazilli, a Morgan Stanley analyst. "The majority of that 401(k) money is still going into open-end mutual-funds. The larger players like Fidelity and Vanguard already offer very low costs on open-end index mutual-funds with all of the record keeping and back-office functions thrown into the mix."

Smaller plans with less than $10 million in assets might not have access to such low-cost index funds, says Allan Roth, president of Wealth Logic LLC in Colorado Springs, Colo. He says he works with several clients whose 401(k) plans offer index mutual funds with expenses ranging up to 2% a year.

He points out that Fidelity Spartan Total Market Index Fund (FSTMX) , for example, is open to most retail investors with an expense ratio of 0.10% per year, while Vanguard 500 Index Fund (VFINX) carries fees of 0.18%.

The culprit, says Roth, is that record keeping and back-end tasks can be huge expenses for smaller firms. "Large companies can negotiate good deals to help defray a good deal of those costs and gain access to the lowest-cost mutual funds available," he added.

That's not always the case with smaller firms since mutual fund companies generally require a certain asset level before agreeing to make their funds available to employees.

"In those cases, ETFs offer a real alternative to index mutual-funds where the middlemen are tacking on a lot of extra fees," Roth said.

BenefitStreet joins smaller firms such as Invest n Retire LLC in Portland, Ore., and Xshares.com as back-office specialists offering ETFs directly to employers.

Drury says that avoiding costs associated with creating a separate legal structure like a collective trust can prove beneficial to many 401(k) plan sponsors. "We can now offer ETFs to our customers with the same record-keeping and administrative costs as we do traditional mutual funds," he said.

BenefitStreet also has separate deals to distribute most popular mutual-fund families through its retirement plan lineup, which now includes about $6 billion in open-end mutual-fund assets and $2 billion in insurance-related funds such as annuities.

For its ETF offerings, BenefitStreet will start by using BGI's iShares funds for its clients. Drury says most plans will work through advisers to set up specific asset allocation portfolios using ETFs. A custodian cost of 0.03% of fund assets will be charged by BenefitStreet to handle commissions and other ETF-related trading costs.

It will also charge 401(k) sponsors for duties such as record-keeping, enrollment meetings and related ongoing client support services. Those annual fees can range from 0.35% on the high end for plans with less than $5 million. A plan with $100 million in assets would pay 0.10% for those services, says Drury.

As with its mutual-funds 401(k) plans, employers can either pass along those ETF-related fees to participants or absorb those charges themselves.

"What we've done is created a system with more pure access to ETFs," Drury said. "It effectively ends the need to add another layer of costs to deal with ETFs in retirement plans."