Not necessarily, as some companies try adding exchange-traded funds to retirement plans

When the 401(k) came into vogue in the 1980s, the mutual fund was the investment of choice. So the retirement plan was built to suit the mutual fund’s particular quirks, including its once-a-day trading and the ability to buy partial shares.

Dan Page

When the average employee understands more about performance and the fees they’re paying, you’ll start seeing more plan providers, especially smaller ones, include ETFs, says Tom Lydon, CEO of Global Trends Investments, an advisory firm that publishes the ETF Trends website. But there are some plumbing issues in getting ETFs into 401(k) plans.

For instance, many 401(k)s administered by Fidelity Investments include Fidelity Spartan 500 Index. which tracks the Standard & Poor’s 500-stock index. It is offered to many 401(k) investors at an annual fee of 0.06% to 0.08% of assets, less than the 0.10% investors pay for the popular SPDR S&P 500 ETF.

ENLARGE

That is one reason big plan sponsors Fidelity and Vanguard Group say they have no plans to start offering ETFs in their 401(k) plans. When ETFs were newer in the marketplace, we had plan sponsors looking interested in the product. They’ve begun to get more informed and understand the products better and understand the way that low-cost mutual funds serve the same purpose, says Beth McHugh, a Fidelity vice president. In some 401(k) plans, Fidelity does offer ETFs through the so-called brokerage window, a feature that allows investors to buy funds and securities that aren’t in the plan’s lineup.

Trading Issues

A thornier issue for ETFs in 401(k)s is the cost of trading fund shares. Mutual-fund shares are traded as a batch at the end of the day through a clearinghouse that charges a negligible fee. ETF shares, on the other hand, must be traded through a brokerage firm that charges commissions on a per-share basis. A company either absorbs this cost or passes it along to its employees holding ETFs in their 401(k)s, says Greg Carpenter, chief executive officer of Employee Fiduciary, a 401(k) plan provider.

If a 401(k) were to allow ETF trading only at the end of each trading day, buy and sell orders could be packaged for better pricing. But if participants were able to trade their ETFs intraday, as other ETF investors do, a company wouldn’t be able to combine trades, likely leaving the plan participant to pay a higher commission.

Another big hurdle to ETF growth in 401(k)s is that ETF trading typically is done in full shares. So if an employee contributes $100 and wants to buy shares of an ETF that trades at $60 a share, $40 of his 401(k) would potentially go uninvested, says Mr. Carpenter.

Eyes on Fidelity

But some plan providers already have found ways to work around those issues. And despite Fidelity’s exclusion of ETFs from its 401(k) lineups, some industry experts suspect that the firm, the largest manager of 401(k) plans in the U.S. eventually will make more ETF offerings available to keep up with the competition, and that other big firms could follow suit.

By filing in December to bring several new ETFs of its own to market, Fidelity showed that clients, including 401(k) participants, are demanding the product, says Mike Alfred, CEO of data provider BrightScope Inc. Fidelity says it has no plans to include any forthcoming ETFs in its 401(k) plans, but also says that could change based on plan-sponsor interest.

James Polisson, managing director of ETFs at Russell Investments, a provider of mutual funds and ETFs, notes that Fidelity recently hired ETF executive Anthony Rochte from State Street Corp. It is very clear they are going to step up their game in ETFs, he says. That likely includes 401(k)s. Fidelity declined to comment on the specifics of Mr. Rochte’s new role.

Making It Work

Meanwhile, the ING Direct ShareBuilder 401(k) plan, recently acquired by Capital One Financial Corp. offers ETFs and nothing else—a model a new plan from Charles Schwab Corp. set to make its debut next year, will follow. A plan from TD Ameritrade Holding Corp. sold only though registered investment advisers, allows plan sponsors to choose from among a menu of ETFs and mutual funds to offer their employees. The company says that in plans that offer ETFs, they make up about 40% of assets on average.

One of the biggest factors keeping expenses down in these plans: All three companies have a brokerage wing, so they don’t have to pay an external broker to make trades. Still, the ING Direct ShareBuilder and TD Ameritrade plans limit ETF trading to once a day—with orders due in by 2 p.m. and 3 p.m. Eastern time, respectively—to limit the burden on their brokers.

Putting all daily orders for a particular ETF together also allows ING Direct to buy full shares and divide them among customers who have orders that include partial shares, says Stuart Robertson, head of the ShareBuilder 401(k). If a share of an ETF costs $150 and two customers have $75 to invest, the plan will split the share 50-50. If there are any leftover partial shares in an order, ShareBuilder manages them. TD Ameritrade keeps leftover fractions of ETF shares in its own account.

Charles Schwab’s forthcoming offering will offer ETF partial shares and keep total costs below those of index mutual funds, says Steve Anderson, senior vice president of Schwab Retirement Plan Services. Company officials are mum on how exactly they’ll offer partial shares. Schwab is also planning to offer intraday trading in its plan and hopes that will draw some interest, Mr. Anderson says.

Though Schwab says its plan is aimed at larger companies, with employee 401(k) assets of $20 million or more, TD Ameritrade and ING say they are targeting small companies that want to offer their employees low-cost options.

Ms. Ensign is a reporter for The Wall Street Journal in New York. Email her at rachel.ensign@wsj.com .