The 401(k) market is seen as the final frontier for the exchange traded fund (ETF) industry to traverse. But there are already pioneers out there staking a claim on this new front. One of them is ING Direct’s ShareBuilder 401(k).

We caught up with ShareBuilder 401(k)’s General Manager and Principal Stuart Robertson, who discussed the benefits of having ETFs in 401(k) plans, why it’s been so slow to catch on and ShareBuilder 401(k)’s own role in the space.

When your company pioneered an all-ETF 401(k) plan in late 2005, ETFs weren’t recognized as a fit for retirement plans. What did you see back then that other providers didn’t?

A. We saw a marketplace typically serviced by more complex and higher-expense funds. This can be very confusing and costly to employers and employees, especially for small businesses. With exchange traded funds (ETFs), we saw the opportunity to build what we believe is a better 401(k) plan for America. ETFs offer lower expenses, a broad array of choices across asset categories and fee transparency. Both mutual funds and ETFs offer solid diversification options for 401(k) plans, but ETFs are often a much lower-expense solution and this can make a big difference in building savings for retirement. [Special Report: 401(k) Plans, ETFs and You.]

What are the differences between a traditional 401(k) made up of mutual funds and one that’s composed only of ETFs?

The majority of 401(k) plans are very different from ETF-based 401(k) plans. ETF-based 401(k) plans are almost universally taking an index-based approach to investing whereas traditional 401(k)s take a more actively-managed approach.

Another related reason is cost.

Traditional 401(k) plans tend to offer actively managed mutual funds with just a few lower-expense index mutual funds. Actively managed funds typically incur greater costs in research and trading than an index fund. For each extra dollar spent, the fund must overcome these expenses to outperform its benchmark index (typically the success measure of the fund). [Slowly But Surely, ETFs Ease Into 401(k) Plans.]

These higher expenses would be fine if evidence supported that actively-managed funds were consistently outperforming the indexes. But overall, they’re not. While no one can predict the future, history has sided with index funds. Across major asset categories, the benchmark indexes have historically beaten 60% to 75% of actively managed mutual funds over a five-year period of time, according to the Standard & Poor’s Indices versus Active Funds Scorecard.

There are other technical differences on how shares are offered, bought and sold, but it still comes down to core cost differences. Over time, high-cost funds can be a big drag on how much a person can save for retirement. That’s why ETFs are a great fit for retirement plans.

Are ETFs in 401(k) plans offered different than those traded at retail?

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