I read with interest the front page story on exchange-traded funds and 401(k) plans that appeared in the August issue ("Rubber meeting the road: Exchange-traded funds' role in 401(k) portfolios growing as ETFs gain traction with investors, plan recordkeepers").
As one of the largest providers of defined contribution plan services and one of the largest purveyors of exchange-traded funds, Vanguard has seen very little interest in exchange-traded funds from sponsors of large and midsized plans.
With the wide availability of traditional low-cost index funds to plan sponsors, the additional cost and complexities of exchange-traded funds do not make sense in many cases.
Specifically, in comparing exchange-traded funds and traditional index funds, you have to consider all costs - expense ratios, bid-ask spreads, commissions and the plan costs associated with the option.
In addition, the tax efficiency of exchange-traded funds and ability to trade them throughout the day have no real appeal to a long-term, retirement-oriented investor in a tax-advantaged plan.
When all of these factors are considered, exchange-traded funds do not bring any unique advantages to the table.
The real story in the DC market is the growth and broad acceptance of target-date funds.
By the end of 2008, nearly 70% of Vanguard's plans offered target-date funds, and 37% of the participants in those plans invested in one.
Industrywide, assets in target funds have grown from $26 billion in 2003 to $191 billion as of June.
John S. Woerth
Principal
The Vanguard Group
Valley Forge, Pa.
