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Why Exchange-Traded Funds are a Great Fit for 401(k) Plans

09/14/2009:

The ShareBuilder 401k investment philosophy is straightforward: enable 401(k) participants to focus on the areas they can control to work towards long-term success. The core fundamentals that drive our fund line-up selection include:

  • Diversification of your money (assets) is critical – having all your eggs in one basket is a bad call
  • It’s a long-term proposition – following short-term trends is not an investment strategy
  • Costs matter – low-expense funds can help your money work harder

It’s why we chose to offer an all-ETF based offering in our 401(k) plans. ETFs are like index mutual funds in that they track the make-up of a market index like the S&P 500 but can be traded throughout the day like a stock. They offer low-expenses, a broad array of asset categories, and fee transparency. And when you consider the following, you can see why ETFs are a great fit for retirement plans:

  1. Index mutual funds have historically beaten 70%+ of actively managed funds over time as detailed in the guide linked to below
  2. Research indicates the key driver of fund performance is low-expenses and manager tenure
  3. ETFs expense ratios are typically lower than even index mutual funds expense ratios
  4. ETFs cover about all major market indices. They also cover specialty categories not typically in retirement plans like Treasury Inflation-Protected Securities (TIPs), a bond fund
  5. While charging a transaction fee for ETF trades is common at most any retail brokerage firm, some 401(k) providers have eliminated this cost

To learn more about why indexing, and in particular, ETFs make sense for long-term investing, give this guide a read. We think you’ll be glad you did.

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