Exchange-traded funds (ETFs) have become a staple in many investors’ portfolios thanks to their low costs, tax efficiency, and broad diversification. But are they a smart addition to a retirement account like a 401(k)? The answer depends on how the plan is structured, your goals, and the flexibility ofဣ employer-sponsored plans.

It’s also important to keep in mind that although ETFs have gained traction in individual retirement💞 accounts (IRAs) and brokerage accounts, their integration into 401(k)s has been slower and more complex. Here’s what to know before relying on ETFs in a retirement savings strategy.

Understanding ETFs

澳洲幸运5官方开奖结果体彩网:Exchange-traded funds (ETFs) are pooled investment vehicles or baskets of stocks that trade on 澳洲幸运5官方开奖结果体彩网:exchanges just like individual stocks. They often aim to track the performance of an index, sector, or asset class and can include a wide range of securities—from domestic and international equities to commodities, currencies, and bonds.

Types of ETFs

There are over 12,000 ETFs on the market, and they vary by type. Here are some of the most common:

• Equity ETFs: Track stock indexes like the 澳洲幸运5官方开奖结果体彩网:S&P 500 and 澳洲幸运5官方开奖结果体彩网:Dow Jones Industrial Average (these are also referred to as 澳洲幸运5官方开奖结果体彩网:index ETFs) or sectors such as 澳洲幸运5官方开奖结果体彩网:technology or 澳洲幸运5官方开奖结果体彩网:healthcare
• Bond ETFs: Give investors exposure to government, corporate, or municipal bonds
• Commodity ETFs: Invest in physical assets like 澳洲幸运5官方开奖结果体彩网:precious metals, gold, oil, or 澳洲幸运5官方开奖结果体彩网:agricultural products
• Currency ETFs: Track 澳洲幸运5官方开奖结果体彩网:foreign exchange movements
• Cryptocurrency ETFs: Invest in digital assets like 澳洲幸运5官方开奖结果体彩网:Bitcoin and Ethereum

This variety allows investors to build highly diversified portfolios tailored to their 澳洲幸运5官方开奖结果体彩网:risk tolerance and 澳洲幸运5官方开奖结果体彩网:investment horizon.

Management Styles

ETFs are often 澳洲幸运5官方开奖结果体彩网:passively managed and meant to track a benchmark index. However, some are 澳洲幸运5官方开奖结果体彩网:actively managed and attempt to outperform the market.

“When evaluating ETFs for a 401(k), it’s important to consider cost, liquidity, and administrative ease,” says , founder of California-based Silicon Beach Financial. “ETFs often have lower 澳洲幸运5官方开奖结果体彩网:expense ratios than mutual fundღs, but they trade like stocks, which can complicate implementa🅘tion in a retirement plan.”

Advantages of Including ETFs in 401(k) Plans

Cost Efficiency

One of the key selling points of ETFs is their low cost. According to data from the Investment Company Institute, the average expense ratio for actively managed equity ETFs is significantly lower than that of comparable 澳洲幸运5官方开奖结果体彩网:mutual funds. “ETFs typically have lower expense ratios than mutual funds, which helps reduc▨e long-term costs,” says Stroup.

These lower fees can be particularly important for retirement planning as they can have a compounding effect over time, especially in a 澳洲幸运5官方开奖结果体彩网:tax-deferred environment where savings remain invested for decades.

Diverse Investment Options

ETFs give 401(k) investors access to a broad range of asset classes and strategies, from U.S. large caps to emerging markets and niche sectors—all of which can help ensure strong portfolio 澳洲幸运5官方开奖结果体彩网:diversification. In some cases, ETFs are also used as building blocks to create custom 澳洲幸运5官方开奖结果体彩网:portfolios or in ETF-based 澳洲幸运5官方开奖结果体彩网:target-date funds, which automatically adjust asset allocations as retirement approaches.

Disadvantages of Including ETFs in 401(k) Plans

Intraday Trading Concerns

Unlike mutual funds, which are priced at the end of the trading day, ETFs can be bought and sold throughout the day at market prices. While this affords investors some flexibility, it can be a double-edged sword for retireme🔯nt savers, says Stroup. “While ETFs can be b🌟ought and sold throughout the day, long-term investors don’t need this flexibility. It may also encourage unnecessary trading,” he says.

In the same vein, it’s important to remember that 401(k) plans are designed for long-term, automated investing—and frequent trading is generally discouraged. By design, the intraday nature of ETFs may conflict with the generally hands-off philo💫sophy of retirement planning.

Tax Efficiency in Tax-Deferred Accounts

ETFs are often lauded for their tax efficiency—particularly their ability to avoid capital gains distributions through in-kind 澳洲幸运5官方开奖结果体彩网:redemptions. But this advanta🌜ge 🧔matters less in a 401(k), where investments grow tax deferred.

“ETFs use an in-kind redemption process, minimizing 澳洲幸运5官方开奖结果体彩网:capital gains distributio🍷ns,” Stroup says. “401(k) participants should know that this matters more in taℱxable accounts.”

In other words, the tax benefits of E🔜TFs are largely neutralized inside a 401(k), where taxes aren’t d🌳ue until distributions are made in retirement.

Plan Integration

One of the biggest hurdles to wider ETF use in 401(k)s is operational. Many 401(k) providers s🅷till lack the infrastructure to support ETFs as seamlessly as mutual funds, limiting their availability in standard plan menus.

“Some 401(k) providers don’t support ETFs efficiently, which makes them less accessible than traditional mutual funds,” says Stroup. Mutual funds, by contrast, are deeply embedded in the 401(k) ecosystem. They allow for easy automation of contributions, dollar-cost averaging, and rebalancing—features that aren’t always available with ETFs.

Current Trends and Adoption

ETF Adoption in 401(k) Plans

Although mutual funds still dominate the 401(k) landscape, ETFs are beginning to gain ground—particularly in plans that offer greater investment flexibility. “More 401(k) plans are starting t🧜o offer ETFs, especially in ൲self-directed brokerage accounts where participants can select ETFs alongside traditional funds,” says Stroup.

These 澳洲幸运5官方开奖结果体彩网:brokerage windows, offered by major providers like Fidelity and Schwab, allow retirement savers to build more customized portfolios that include ETFs targeting specific sectors, regions, or strategies. Additionally, some plan sponsors are exploring ways to reduce fees by incorporating ETFs into their core investment menus, Stroup says.

Innovative 401(k) Plans Using ETFs

Some forward-looking employers are taking a more progressive approach by integrating ETFs directly into their 401(k) offerings. One notable trend is the development of ETF-based target-date funds—portfolios that automatically shift asset allocations as participants near retirement, using low-cost ETFs instead of mutual funds, Stroup says.

These ETF-based solutions aim to deliver the same hands-off investing experience as traditional target-date funds but at a potentially lower cost. They’re also being used by 澳洲幸运5官方开奖结果体彩网:robo-advisors and 澳洲幸运5官方开奖结果体彩网:managed account platforms embedded within 401(k) plans.

The Bottom Line

ETFs offer compelling benefits for retirement planning (and investing)—low costs, 澳洲幸运5官方开奖结果体彩网:diversification, and transparency—but they aren’t always a perfect fit for 401(k) plans. Their intraday tradability and tax efficiency matter less in a retirement account, and plan integratio൩n remains a key barrier.

Still, with the rise of adoption—including through self-directed brokerage windows and ETF-based target-date funds—more retirement savers will likely gain access to ETFs over time. As always, the best option depends on your specific plan and your long-term goals.