InvestmentNews looked into the changes taking place in 401(k) plans.  Exchange traded funds have lower expense ratios than mutual funds.  Not all index mutual funds perform as well as the index.  Why then should a 401(k) plan buy a mediocre fund at double the cost of an ETF? 

Small plans should find ETFs appealing, even though there is a trading commission.  Larger plans, with access to institutional index funds, may not find it as appealing, since the fee is lower on the institutional fund.

Avatar Associates is working to bring ETFs more into the mainstream 401(k) universe.  They are creating a series of five collective trusts based solely on ETFs, which will only be available for qualified retirement plans.  The trusts will be similar to lifestyle funds or hybrid funds that maintain certain risk levels, and will range from defensive to aggressive.  The expense ratios will be less than the average for institutional target date funds.

As ETFs find more ways into 401(k) plans, this could mean problems for mutual funds.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.