“Some people are saying that ETFs are God’s gift to 401(k) investors, but really index funds are God’s gift to 401(k) investors,” Hougan said in a recent Reuters article. “If you can get a Vanguard index fund for five basis points in a 401(k) plan, why would you want an ETF.”
Aside from low fees, Liik said 401(k) investors may be drawn to ETFs for the full transparency of their underlying holdings, while most mutual funds disclosure quarterly with a lag.
ETFs also allow investors to trade during the day, but that feature is less important for long-term 401(k) investors.
“When fees become a focus, as they should, ETFs will have to be included in the mix. Yes, there are barriers that can hinder the growth of ETFs in DC plans,” Liik said. “For example, ETFs don’t offer fractional shares; they must be traded through a broker, which could lead to higher trading costs, and opening up the broker window could lead to investors’ acquiring any publicly traded product, including stocks and any ETF. Another obstacle: Multiple retirement plan recordkeepers are affiliated with mutual fund companies and may be reluctant to cede shares to ETFs. However, the industry is addressing many of these issues.”