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401(k) Plans: The Final Frontier for Exchange-Traded Funds

AInvestThursday, Oct 17, 2024 10:56 am ET
2min read
Exchange-traded funds (ETFs) have revolutionized the investment landscape, offering low-cost, diversified, and flexible investment options. However, their penetration in 401(k) plans has been relatively slow compared to other investment vehicles. This article explores why 401(k) plans are the final frontier for ETFs and the factors driving their increasing adoption.


Historically, 401(k) plans have been dominated by actively managed mutual funds. However, the lower expense ratios and intraday trading capabilities of ETFs have started to make them an attractive alternative. According to Vanguard's "How America Saves 2024" report, ETFs accounted for only 5% of 401(k) plan assets in 2023, indicating significant room for growth.


The lower expense ratios of ETFs translate to better long-term returns for 401(k) investors. For instance, the Vanguard Information Technology Index Admiral Shares (VITAX) has an expense ratio of just 0.1% and a 10-year average return of 20.6%. This compares favorably to many actively managed mutual funds, which often have higher expense ratios and lower returns.

The intraday trading capability of ETFs can impact participant behavior and decision-making in 401(k) plans. While this can encourage excessive trading, it also allows for greater flexibility and the ability to react to market changes more quickly. Plan sponsors can mitigate excessive trading by educating participants about the benefits of long-term investing and providing tools to help them make informed decisions.


The complexity of record-keeping and operational processes for ETFs in 401(k) plans can be effectively managed through technology and collaboration. Plan sponsors can work with their recordkeepers to streamline the process, and advancements in technology can help automate many of the tasks associated with ETFs.

Growing participant preferences and demand for ETFs are influencing the incorporation of these investment options in 401(k) plans. As millennials, who tend to prefer low-cost, passive investments, become a larger portion of the workforce, the demand for ETFs is expected to increase. Plan sponsors are adapting their strategies to accommodate ETFs, negotiating lower expense ratios and offering more investment options.


Regulatory changes, such as the Department of Labor's fiduciary rule, have also influenced the adoption of ETFs in 401(k) plans. The rule requires plan fiduciaries to act in the best interest of participants, which has encouraged the adoption of lower-cost investment options like ETFs.

Advancements in technology, such as improved record-keeping and trading platforms, have facilitated the integration of ETFs into 401(k) plans. These technologies can help plan sponsors and participants better understand and manage their ETF investments, ultimately leading to better outcomes.

In conclusion, 401(k) plans are the final frontier for ETFs, with significant opportunities for growth and adoption. The lower expense ratios, intraday trading capabilities, and growing participant preferences are driving the increasing incorporation of ETFs in 401(k) plans. As plan sponsors and participants alike recognize the benefits of ETFs, they are likely to become an increasingly important component of retirement savings strategies.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.