ETFs in 401(k)s: Ticking time bomb or investor’s Holy Grail?

A reader recently asked if I was “for or against” ETFs in 401(k) plans. I’ve spoken on this issue for several years at various national conferences. I’ve reported on the topic from still other conferences. But, rather than merely repeat pre-existing public record, I decided to dip further back into a piece of my writing portfolio that has yet to find its way into the digital world. My response: “A better question might be whether I was for or against mutual funds in 401(k) plans.”

My 1999 book “Due Diligence: The Individual Trustee’s Guide to Selecting and Monitoring a Professional Investment Adviser” spoke of a scenario whereby a 401(k) fiduciary needed to select investment options. Using an example with only a growth fund and a value fund, I wrote

“Though consistently sticking to either ‘growth’ or ‘value’ over the long haul can provide adequate returns, unsophisticated investors attempting to time between either can lead to disastrous results. As a fiduciary, you prefer to create a structure that helps the beneficiaries avoid making this mistake.”

Given the demand for unitized portfolios, there was a shift away from managing individual portfolios in 401(k) plans towards the use of mutual funds. As a result of these conflicting realities, I recommended

“because you want to encourage employees to have a long term approach and you want to help them avoid doing anything close to market timing, you limit their ability to switch between investment options to semi-annually.”

Remember, retirement investing is for the long haul and you just want to point the ship in the right direction, you don’t want to run out of fuel by zigging and zagging all the way to your ultimate destination.