Charles Schwab has blazed a trail in both the ETF and retirement industry in rolling out an ETF-only 401(k) platform. It debuted in February after several delays and three years in development. Investors can choose from 78 different ETFs from 11 providers including commodities, precious metals and emerging market bonds, which are not typically offered in retirement plans.

Steve Anderson, president of Schwab Retirement Plan Services Inc. explains how Schwab pulled off this feat.

IBD: How did your firm develop an ETF-only 401(k) platform? What hurdles did you have to overcome to achieve this?

Anderson: We had to construct a completely different kind of recordkeeping platform. Traditional 401(k) recordkeeping platforms are built on a business model from the 1980s and 1990s, designed to accommodate mutual funds, which tend to be more expensive.

Schwab Index Advantage allows the processing of partial shares of ETFs to accommodate the dollar purchases and exchanges most common in 401(k) plans, and trades can occur when the market is open. In addition, the ETFs that employers offer in their plans as part of Schwab Index Advantage will trade commission-free.

IBD: How does the partial shares mechanism work? And how is it different than with mutual funds?

Anderson: Mutual funds are built to handle dollar-based investments, like the regular payroll contributions people make to their 401(k)s. Even if a single share of a mutual fund costs $63, you still can invest $50 and receive a partial share. However, since ETFs only trade in whole shares, we had to develop a process to facilitate partial share orders on behalf of plan participants, and also enable them to trade intraday.

IBD: What had to be done to get partial shares to work?

Anderson: We built a patent-pending process at Schwab that integrates our 401(k) recordkeeping system, our bank trust/custody services and our broker/dealer so plan-level payroll purchases and individual participant orders can go to market throughout the trading day.

IBD: What are the issues with using ETF intraday trading in 401(k)s? Is it no more complex than plans that allow trading in individual stocks?

Anderson: We had to develop a way to enable intraday investing at the plan level and for participants. Most provider systems today were built to trade mutual funds once a day at market close, so they are unable to handle ETFs effectively. Other ETF 401(k) solutions we see in the market today often unitize shares, batch trades, or trade only once a day at a single price. These approaches can add investment cost and also limit the timely trading associated with ETFs. In addition, some plans offer a self-direct brokerage account (SDBA), which is basically a brokerage account within the 401(k) plan. Participants using a SDBA can also access ETFs that way, but ETF orders in a SDBA must be in whole shares.