ETFs Cross 401(k) Barrier

Exchange-traded funds have been a smash hit in every realm but retirement accounts, where the going has been more like a real-world version of Mission: Impossible. But a new crop of companies is seeking blockbuster results by bringing ETFs to a 401(k) plan near you.

The ETF success story is fairly well known by now. ETFs are index funds that trade continuously during market hours like stocks. The first ETF, the Standard & Poor's Depositary Receipts(SPY), commonly known as the "Spyder," was introduced in 1993. Since then, nearly 250 ETFs with a total market value of $350 billion have come to the market, including popular commodity ETFs like the streetTRACKS Gold(GLD) and the U.S. Oil Fund(USO).

The low costs and transparency of ETFs have made them popular among individual and institutional investors alike. Nevertheless, because ETFs trade like stocks, excessive trading costs have played a part in keeping ETFs out of the vast 401(k) market. Record keeping issues also have raised problems, since ETFs, like stocks, settle in three days, while traditional mutual funds offer a net asset value at the end of each day.

"As for ETFs being a core 401(k) investment option in all plans, there have been certain platform barriers to overcome," says Lance Berg, spokesman for Barclays Global Investors, the ETF industry giant with close to $200 billion in assets spread across more than 100 funds. "However, with investors and advisers embracing the many benefits of ETFs, we feel it is inevitable."

BGI would be a big beneficiary if ETFs take even a minor foothold in the nation's retirement accounts. According to the Investment Company Institute, at the end of 2004, mutual funds accounted for $3.1 trillion, or 24%, of the $12.9 trillion U.S. retirement market. The remaining $9.8 trillion of year-end 2004 retirement-market assets were managed by pension funds, insurance companies, banks and brokerage firms.