Exchange traded funds are making inroads to the 401(k) retirement plan market, where participants are increasingly leaning to lower-fee funds.

Expense ratios of funds in retirement plans are getting smaller. On average, the asset-weighted stock funds paid within a 401(k) plan by investors was lower in the year 2010. Expense ratios in these investments were down 3 basis points, or 0.71%, reports the Investment Company Institute.

“401(k) plan sponsors are aware of the costs associated with fund ownership, regularly evaluate investment options in their plans, and are seeking and getting good value in mutual funds,” said Sarah Holden, Senior Director of Retirement and Investor Research. “The drop in the average expense ratio incurred by 401(k) investors in stock mutual funds reflects cost-conscious decision making by plan sponsors and plan participants, as well as the impact of rising stock values in 2010, which helped to spread fixed fund expenses across a larger asset base.” [Brokers Offer Commission-Free ETF Trades.]

The timing for ETFs to break into the 401(k) landscape is ripe, as investors search for lower costs. The decline in expense ratios is also a result of the low interest rate climate, as well as the fee waivers by many money market fund providers.[Growing Demand for ETF-Based 401(k)s.]

Another factor is if the mutual funds presented within a 401(k) plan have a sales charge. Funds that do carry these expenses may waive those charges for 401(k) plan participants. However, ETFs generally do not carry these charges.

“ETFs are low-expense leaders, given the low costs inherent with passive management of index-based funds, and they avoid some trading costs inherent with mutual funds. Putting these low-cost investment options to work can often lower employee expenses by half or more,” says Stuart Robertson, Head of ING’s DIRECT Sharebuilder 401(k) unit.

Tisha Guerrero contributed to this article.

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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