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Exchange-Traded Funds (ETFs) are quickly becoming popular in 401(k) plans. Why you ask? Well, three big reasons include:

• Low-expenses with no 12b-1 fees or other fees commonly found in 401(k) plans (transparency is a great thing).
• Historical performance advantages of index-funds versus actively managed mutual funds.
• Greater recognition in the marketplace from respected brands and professionals.

Lower Expenses and Higher Performance

ETFs are low-expense leaders given the low costs inherent with passive management of index funds, and ETFs avoid some trading costs inherent with mutual funds including index mutual funds. Lower expenses help employees keep more of their money invested versus paying more to investment firms. Keeping more money invested has paid off for investors too. As we discussed in an earlier piece. research shows that low-expense funds have historically beaten high-expense funds in every asset class and period tested.

This is quite a big deal in retirement plans as ETFs can often lower employee expenses by half or more in the typical 401(k) plan. Most company plans are built with actively managed mutual funds that can be pretty expensive. In small and mid-sized plans, the average participant fees tend to range from 1.5% to 2.5%, even more. ETF expense ratios are typically less than 0.50% with most major funds in the 0.10% to 0.20% range. Now you can start to see how an investment line-up with low-expense ETFs can make a big difference. It is difficult for professional managers to consistently achieve performance greater than a benchmark index because they have to overcome these costs. You’ll often see this year’s high performing actively-managed fund be tomorrow’s loser as economies, businesses, and fund managers change. We may not be able to control the markets, but we can control costs and that has led to a meaningful advantage over time.

Big Brands Helping Drive a Big Shift

SPDR and iShares, as well as some other ETFs providers, have led the ETF revolution and are well-known brands among investment professionals and sophisticated investors alike. Yet they are less familiar names to the general public. Vanguard, a trusted and popular brand, is a name that even most first-time investors know. Vanguard has become a major fund provider in the ETF marketplace and is helping speed market familiarity and acceptance among mainstream investors.

When you go deeper and examine the 401(k) space, strong brands like ING DIRECT’s ShareBuilder 401k are already established and known for their low-expense, ETF-based 401(k) plans and several other name-recognizable players are following suit. With greater exposure in the retirement marketplace, ETF-based 401(k) plans are well positioned for accelerated growth over the next five years. That’s a great win for investors and a much brighter future for 401(k) plans.