U.S. ETF providers are working hard to crack the DC market, with Charles Schwab preparing to launch an all-ETF 401K. Schwab is hoping to gain an advantage in the retirement space by undercutting competitors with cheaper ETF-based products. CEO Walter W. Bettinger II commented in February 2011 that the move would “really break glass” through the introduction of the “first fully scaped and fully functional ETF-only 401K program in the industry….I don’t mean once a day trading…I man the true access to intra-dat ETF-funds exclusively within your 401K.”
As the US 401K market stands on the verge of opening up to passive strategies, some argue that the Canadian CAP space should be doing the same. In a recent blog post on Canadian Investment Review, pension governance expert, Gerry Wahl, managing partner of Ampersand Advisory Group, sets out his argument for why passive investments in CAPs makes sense, not just for plan members, but for plan sponsors concerned with fiduciary issues. Notes Wahl, “Theory, return history, the methodology for CAP asset mix recommendations, and administration are key issues.”
Wahl covers some well trodden ground by sketching out the active versus passive investment debate, but he also lays out what he sees as the fiduciary advantages to using index funds and even ETFs within a CAP portfolio, including simplified member education and communication and the fact that passive investments make it easier to explain the investment options to members and trustees.
Passive investments as good governance? Yes, says Wahl. In addition to the communication-based advantages, he argues that lower management fees in the passive space are also good from a fiduciary perspective. Passive investments also ensure diversification within an asset or sub-asset class and that style and sector rotation occurs automatically over time.
Simplified monitoring is also an advantage says Wahl who writes that index funds are automatically in sync with record keeper asset mix recommendations, that monitoring return and risk performance is easier, and that explaining volatility is less of an issue (and also easier).
All this adds up to lower time and cost on the administration front – and on the pension committee and trustee side too.
Given the advantages, Wahl wonders why passive investments are more of a staple in the CAP space today. But as providers like Schwab work to break into the DC area, it could prompt change in Canada.
What do you think? Do you believe more CAP plans should offer passive investors to members? And are they beneficial from a fiduciary stance as Wahl suggests? Share your comments below.