ETFs Target Retirement Market

Exchange-traded funds are starting to make inroads into 401(k) plans, creating the potential for explosive growth in these baskets of securities that trade throughout the day like stocks. But some people are skeptical that ETFs will -- or should -- ever play as big a role as mutual funds in helping Americans plan for retirement.

The market for ETFs rose to $432 billion at the end of 2006 from $464 million in 1993, the year they were launched, according to fund tracker Morningstar. But the industry is still tiny compared with the $10 trillion in mutual funds.

That could change over the coming years as more defined contribution plans offer ETFs as investment options alongside mutual funds and individual stocks.

"The ETF market would explode," says Darwin Abrahamson, chief executive of Invest n Retire, a Portland, Ore., company that has designed and runs retirement plans capable of trading ETFs. As a result, he says, "there would be a negative outflow of open-ended mutual funds" as investors switch the assets in their 401(k) plans into ETFs. "It will be very damaging to mutual funds."

The mutual fund industry is certainly benefiting as corporate America forces more of its employees to save for their own retirement. At the end of 2005, 23% of individual fund owners held the investment products in an employer-sponsored retirement account of some kind, according to the Investment Company Institute, a mutual fund industry trade group. Half of the assets in 401(k) plans alone, or $1.2 trillion, were in mutual funds.