AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 11/20/2007 Subject: ETF's in Retirement accounts
Question Hi there!
I have a question about using Exchange-Traded Funds (ETF's) instead of Mutual Funds for my retirement accounts IRA and 403B.
I have read several books about investing including books about mutual funds and about ETF's.
I noticed that the expense ratios for ETF's average around 0.4 while the expense ratios for Mutual Funds are on average around 1.5
So since there is such a difference I would like to put ETF's into my retirement account instead of mutual funds.
But I wanted to discuss how this works?
Because currently with my 403B here in Wisconisn with ING, they take an amount from my paycheck monthly and divide it up and place a bit of that money into each of the 8 Mutual Funds that comprise my 403B.
How would that work with ETF's?
Because as you know there is that trading fee each time you buy! And that would add up big time.
The only way I can think of is to only contribute say quarterly (every 3 months) and put say $3000 (each quarter) into the 403B but only into one ETF at a time. (Because the book I read says the trading fee should only be about 0.5% So if the trading fee is $15, the amount to invest at a time would be $3000)
Is this method even possible? Can it be set up this way?
I understand the maximum I can invest in IRA/403B is 5K/15K respectively.
Answer In regards to your question, the first thing to confirm is whether or not ETF's are on the investment platform for your 403b. Assuming so, or in the case of your IRA where you should be able to purchase them, the biggest hurdle for most people is the transaction fee charged for purchasing ETF shares which is usually the same cost as buying shares of an individual stock. One way to make this more efficient is as you mentioned; instead of investing monthly, invest quarterly. In the 403b, assuming auto contributions from each paycheck, you could either place the $$ into mutual funds and then transfer to an ETF/ETF's every quarter or keep the $$ in cash and invest in the ETF/ETF's each quarter. If you have the flexibility, I would invest in the mutual funds each time $$ are deposited into the account and then transfer the $$ to ETF's once the $$ amount in the mutual fund is large enough to justify the fee to purchase the ETF. In regards to the IRA, whether you should use mutual funds or ETF's for the existing balance depends on the value of the account and whether or not paying the fee to purchase makes sense. For the $5k additions each year, this amount would justify paying the fee to purchase in my opinion. I hope this helps.
