Why iShares ETFs in 401k Plans?

Pay Lower Fees

High fees erode 401(k) plan performance.

The chart below from a Government Accountability Office report illustrates exactly how much internal expenses matter.

• Over the course of 20 years, a $20,000 investment, earning 7% annually and paying 0.5% annual fees, will grow to about $70,500.
• But if fees are 1.5%?a mere 1% difference?that same $20,000 will only grow to about $58,400.

This is approximately a 17% difference in asset value.

iShares ETFs are a low-cost alternative to traditional mutual funds, with expense ratios that are typically well below those of both active and index mutual funds.

The average expense ratio of an iShares ETF is 0.41%, versus the average active mutual fund expense ratio of 1.21%, a 0.80% difference that can result in significant savings at retirement.¹

Expense Ratios for ETFs tend to be significantly lower than those of traditional mutual funds. Higher expenses can adversely affect fund performance.¹

Source: Strategic Insight, 12/31/09. The annual management fees of iShares funds may be substantially less than those of most mutual funds. iShares transactions may result in record-keeping fees, but the savings from lower annual fees can help offset these costs.

While iShares ETFs and mutual funds each hold baskets of securities, some key differences do exist. iShares ETFs trade on exchanges intraday at market price, which may be greater or less than net asset value, and shares of iShares ETFs are not individually redeemed from the fund. In addition, iShares index ETFs are passively managed; they seek to track a market index, before fees and expenses, and do not attempt to outperform during rising or declining markets. iShares ETF performance may diverge from the ETF's underlying index.

In comparison, mutual funds are accessed directly from the fund company or through a select broker, pricing generally occurs once a day, and investors buy or redeem shares at the end-of-day net asset value, less any applicable fees. Some mutual funds may charge redemption fees. Mutual funds may be either actively managed or track an index. The structure of both active and index mutual funds is similar, but the management strategy differs. Active mutual funds seek to outperform their benchmark while the goal of index mutual funds is to track their index. Consequently, active funds typically charge more than index-linked products such as an exchange traded fund, or an index mutual fund, for the increased trading and research expenses that may be incurred.

1. Strategic Insight, 12/31/09. The annual management fees of iShares Funds may be substantially less than those of most mutual funds. iShares transactions may result in record-keeping fees, but the savings from the lower annual fees can help offset these costs. Other plan fees may apply.

2. "Management Fees" are fees paid to BlackRock Fund Advisors, the Fund's investment advisor, an affiliate of BlackRock Investments, LLC. Fees shown are as of 12/09. A Fund may also incur indirect expenses on its investments, if any, in other investment companies. Please see the Fund's prospectus for more information on such expenses.

3. The total annual operating expenses are shown for the iShares Barclays Aggregate Bond Fund. In addition to the management fees, the total expenses include "acquired fund fees and expenses" of 0.04%,which are related to the fund's investments in the BlackRock Cash Funds: Prime (the "money market fund"). "Acquired fund fees and expenses" represent the fund's pro rata share of the fees and expenses charged by the money market fund and may vary based on the fund's allocation of assets to the annualized net expenses of the money market fund. Annual operating expenses do not include the effect of interest earned by investments in the money market fund, which is expected to offset the money market fund's fees and expenses.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., Russell Investment Group or Standard & Poor's, nor are they sponsored, endorsed or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.