Jen Ryan Dow Jones Newswires

Updated Nov. 8, 2005 12:01 a.m. ET

More companies are devising ways to include exchange-traded funds in company-sponsored 401(k) retirement plans.

The latest to marry ETFs with 401(k)s is independent trust company AST Trust Co. The Phoenix-based firm plans to announce today that it is rolling out 10 collective funds — which are similar to mutual funds, but are designed exclusively for qualified retirement plans.

Due to their low expenses and transparency, many firms have been trying to make ETFs — which resemble index-tracking mutual funds but trade on an exchange like stocks — more widely available in 401(k) plans. But trading issues have made that difficult. A handful of companies, though, have come up with ways to overcome these issues, and that group keeps getting larger.

Of AST Trust’s 10 collective funds, six are classified by their market capitalization and/or investment style, two are bond funds, one is an international equities fund and another represents emerging-market stocks. AST looks for the best ETF in each asset class and has the flexibility to choose ETFs from any fund family.

In addition to its underlying ETF, which composes 90% of the collective fund, each of the funds also holds a conventional index fund that tracks the same index as the ETF. This gives the fund greater liquidity to accommodate trading and also helps it track the index more efficiently.

The funds charge total annual expenses of 0.06% each, though there may be additional auditing or transaction fees. The funds will be available through Fidelity Investments and Nationwide Financial Services Inc. ‘s platforms, as well as several others.

One of the benefits of putting ETFs in a collective fund is that it cuts the commission costs that are charged each time an ETF is traded — an issue that has been largely responsible for keeping ETFs out of 401(k)s.

Because investors’ money is pooled together, we’re able to make purchases that cover a wide range of investors, says Steve Ferber, executive vice president of collective-fund operations at AST. He says that the firm has also worked out agreements with some ETF and index providers to further cut costs with in-kind trades — swapping securities for ETFs — or by trading in high volumes.

There’s another issue with ETFs that can be avoided by offering them through collective funds. There are very few, if any record-keeping systems that can trade and handle the nuances of ETFs, says Fred Barstein, chief executive of 401K Exchange, an online service that provides tools and information to 401(k) retirement advisers, plan sponsors and service providers.

The reason is that ETF trades, like stock trades, take three days to be settled, but retirement accounts process transactions on a daily basis, making record-keeping a challenge. By putting the ETFs inside a collective fund, AST is able to process transactions daily as a mutual fund would.

Another advantage of AST’s collective funds is that they’re available for trading through FundSERV, the clearing platform for the National Securities Clearing Corp. which makes them widely accessible to plan sponsors and plan providers.

AST isn’t the first to propose a way to put ETFs in 401(k)s, nor is it the first to do this through collective funds. In 2004, Advisors Capital Resource, of Manchester, N.H. teamed up with Houston firm Hand Benefit & Trust Co. to offer ETFs through collective funds, though the products differ from AST Trust’s in several key areas.

There are several companies that have found other ways to offer ETFs through 401(k)s. One of the best-known is Portland, Ore.-based Invest n Retire LLC, which offers several model portfolios made up largely of ETFs and some mutual funds. The company bundles trades together so as not to pass along all the trading costs and makes trades once a day.

Meanwhile, Banneker Capital Management has partnered with a record-keeping company BenefitStreet Inc. to offer entirely ETF-based managed portfolios on 401(k) platforms; Fulcrum Financial has an all-ETF 401(k) platform through which it offers 14 ETFs; and, as of last month, online broker Sharebuilder Securities Corp. offers an online service for small businesses to set up 401(k) plans consisting entirely of ETFs.