Despite the success and increasing popularity of exchange traded funds (ETFs), these versatile funds have had a difficult time getting into many retirement accounts. Why?

  • For one, cost-effective trading software that allows participants to track the ETFs in their accounts is not available yet.
  • Secondly, owning whole and fractions of shares of ETFs is not possible yet within these accounts.

Denise Appleby for Investopedia reports that although both mutual funds and ETFs are made up of securities within the underlying index, trading features and pricing differs greatly. Over time, mutual funds’ high fees can reduce the balance within a participant’s retirement account. Most of these annual fees are trade-related and can amount up to 1% of a participant’s 401(k) balance. ETFs offer a solution to this problem because they generally do not have the management fees that mutual funds carry. In addition, financial advisers want ETFs in retirement plans because they offer the most fiduciary protection. Financial advisers also like that ETFs come without a lot of hidden fees and generally are less expensive than mutual funds or index 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.

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