ETFs can now be placed into retirement plans

Mid Atlantic Trust Company says it has resolved recordkeeping problems that have kept exchange-traded funds from being part of holdings in 401(k) and other retirement plans.

The state-chartered trust company says it has resolved a problem with fractional shares that result from trading in ETFs that have kept such funds from being kept in retirement plans. The firm says it will buy and sell whole shares in the market and hold fractional shares as necessary. This will allow “dollar certain” transactions that until this have prevented the information systems that keep track of funds from recognizing and tracking ETF shares.

Shares will be bought at end-of-day prices, allowing same-day settlement for recordkeeping purposes. Mutual funds historically have determined the value of their assets at the end of each trading day, for their investors. ETFs, however, follow the three-day settlement cycle of equities markets.

In postings to its website, Mid Atlantic says this will “allow record keepers the ability to handle ETFs using the same systems and processes they already have in place for trading mutual funds.’’

Roughly $13 trillion are held in the United States in mutual funds, which surged in popularity in the ’80s and ’90s. At the end of 2012, $1.3 trillion was held in the U.S. in ETFs, which got started 20 years ago by State Street Corporation. The ability to trade shares in the funds as if they were shares of stock has made them an increasingly significant part of equities trading on national exchanges. In 2012, exchange-traded products accounted for 14.3% of all trading on stock markets in the United States.

A technology unit of the company, Mid Atlantic Financial Platforms, has introduced what it calls the ETFxChange, to resolve the recordkeeping issues and spur their use in retirement plans.

Shares of ETFs from BlackRock’s family of iShares products, as well as ETFs from PowerShares, Wisdom Tree, State Street and Vanguard also can be handled by the system. Stadion Money Management in Watkinsville, Ga., confirms that it will use the platform on behalf of its customers. 

Roughly 90% of the assets under management at Stadion are placed into exchange-traded funds, according to vice president and portfolio manager Will McGough. But, until now, participants in the plan only see that a portion of their assets are held in the Stadion 2010 Target Date Fund, for instance. Now, investors will see the individual ETFs being bought and sold, as McGough or another manager allocates the purchases or sales across all participants.

Two-thirds of the assets placed in funds managed by Stadion are held in qualified retirement plans, McGough says.

Mid Atlantic also launched a related ModelxChange that allows money managers, investment advisors and plan recordkeepers to create and maintain investsing models for 401(k) plans that mix ETFs with mutual funds.

Tom Steinert-Threlkeld is Editorial Director of SourceMedia’s Money Management Group.