ETFs Target Retirement Market

Bogle acknowledges that, as a long-time proponent of the buy-and-hold strategy, he may be perceived as having a bias against ETFs. But he says it's not ETFs that are the problem. "An investor is their own worst enemy," he says. "There are some very good ETFs out there, and they are inexpensive to operate. But you have to pay a commission every time you trade them."

He points out that "what we all earn is our return minus the cost of playing the game." And the more frequently investors trade, the less likely they will be able to cover those costs. "It's exactly like gambling."

ETF providers don't believe the investment vehicle should be excluded from 401(k)s just because it permits investors to meddle too much with their retirement savings. "We're not encouraging active trading within a 401(k) account," says Lance Berg, a spokesman for Barclay's Global Investors, the largest ETF provider in the U.S. "The advantages of ETFs are their low fees and transparency, and we think there can be strong demand in non-taxable areas."

One of the biggest obstacles to making ETFs available through 401(k)s isn't philosophical but technical. That's because many employer-sponsored retirement plans were designed to accommodate open-end mutual funds and other pooled investment vehicles that can only be bought or sold once a day and can be traded in fractional shares. They don't have the infrastructure to track and keep records of more frequent trading.

Moreover, ETFs can only be traded in whole shares, a complication for investors who contribute a fixed dollar amount from each paycheck.

Abrahamson, the Invest n Retire executive, says his company has found a way around the technical difficulties.

While most 401(k) providers use third-party software for record keeping, Invest n Retire handles it in-house. "Our answer is that we can record keep the ETFs," he says. "All this software out there for 401(k)s is old and has been repatched. But we built our own software that is capable of keeping track of mutual funds, ETFs and stocks."