At Extreme Investor Network, we believe in providing our readers with unique and valuable insights into personal finance. Today, we want to dive into the world of exchange-traded funds (ETFs) and how they have yet to gain significant traction within 401(k) plans.
ETFs have been around since the early 1990s and have amassed about $10 trillion in assets. While they have seen significant growth over the years, mutual funds still hold a larger share of the market at around $20 trillion. However, ETFs have been steadily chipping away at mutual funds’ dominance, with a 32% market share compared to 14% a decade ago, according to Morningstar Direct data.
Despite their popularity in wealth management accounts, ETFs have not seen the same level of adoption among 401(k) plan participants. At the end of 2023, 401(k) plans held a staggering $7.4 trillion in assets, with over 70 million participants. Yet, very little of those assets are invested in ETFs.
Philip Chao, a certified financial planner, notes that there is a massive opportunity for the ETF industry within workplace retirement plans. With 401(k) assets expected to grow, tapping into this market could be the next big frontier for ETFs.
One of the key reasons for the slow adoption of ETFs in 401(k) plans is the decision-making process involved. Employers are responsible for choosing the investment funds available to their employees, and ETFs may not always be on the menu. Additionally, the traditional infrastructure of workplace retirement plans was not designed for intraday trading, a feature that ETFs offer.
While ETFs have certain advantages over mutual funds, such as tax benefits and intraday trading capabilities, those benefits may be considered irrelevant within the context of 401(k) plans. Plus, the complexity of mutual fund fee structures can make them appear more appealing to investors who may not be aware of the various costs involved with ETFs.
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