Core options in plans are valued once per day in a daily environment on nearly all administration systems. This means that ETFs are either relegated to being part of the brokerage window or they are unitized.

Unitization — essentially the ETF holdings for all plan participants are held in a commingled fund, kinda like a mutual fund — has a number of drawbacks. The unit price of the fund is likely to drift from the ETF NAV, confusing participants. The fund will make all trades on a net basis once per day, confusing participants who believe they can trade through the day or “time” the market during the day.

Unlike many that use 12b-1 fees or R share clases, ETFs lack the flexibility to pay for their distribution. While this is a plus as per your post, it is a minus in the marketplace. Essentially, the cost structure necessitates that the ETF maker (BGI, Vanguard, SSgA) pay the distribution costs. This is not happening so far because the distribution costs are higher than the fees collected on the funds. In short, the makers do not want to lose money. This could be fixed if plan sponsors paid the shortfall, but this is not happening in practice.

While a handfull of TPAs/RIAs have overcome the technical problems, they charge advisory fees in most cases. They also lack the ability to scale their businesses. As long as this is the case, ETFs will remain a niche product for small employers.

Large employers seeking cost efficiency have more effective solutions, including institutional class shares and separate account products. An institutional separate account for a plan with nine figures in assets can be had for a couple basis points. It can also be made to work with the plan’s recordkeeping system.

The final challenge is the 900 pound gorilla in the room. There is no economic reason for the plan administrators to allow ETFs into their products — they are offered by competitors and their is no economic upside. That leaves the matter up to the employer/plan sponsor to force it.