A reader recently asked if I was “for or against” ETFs in 401(k)plans. I’ve spoken on this issue for several years at variousnational conferences. I’ve reported on the topic from still otherconferences. But, rather than merely repeat pre-existing publicrecord, I decided to dip further back into a piece of my writingportfolio that has yet to find its way into the digital world. Myresponse: “A better question might be whether I was for or againstmutual funds in 401(k) plans.”

My 1999 book "DueDiligence: The Individual Trustee’s Guide to Selecting andMonitoring a Professional Investment Adviser" spoke of ascenario whereby a 401(k) fiduciary needed to select investmentoptions. Using an example with only a growth fund and a value fund,I wrote

“Though consistently sticking to either ‘growth’ or ‘value’ overthe long haul can provide adequate returns, unsophisticatedinvestors attempting to time between either can lead to disastrousresults. As a fiduciary, you prefer to create a structure thathelps the beneficiaries avoid making this mistake.”

Given the demand for unitized portfolios, there was a shift awayfrom managing individual portfolios in 401(k) plans towards the useof mutual funds. As a result of these conflicting realities, Irecommended

“because you want to encourage employees to have a long termapproach and you want to help them avoid doing anything close tomarket timing, you limit their ability to switch between investmentoptions to semi-annually.”

Remember, retirement investing is for the long haul and you justwant to point the ship in the right direction, you don’t want torun out of fuel by zigging and zagging all the way to your ultimatedestination.

Ironically, that same unitized accounting structure has hamperedthe use of ETFs in 401k plans. Administration is perhaps the mostsignificant impediment identified in 5 reasons why a 401k plan fiduciary should reconsider usingETFs. As more recordkeepers have restructured their systems tosolve this unitization issue, other trading issues have becomeapparent. Unlike mutual funds, for example, ETFs cannot tradefractional shares, making the often smaller trade amounts of many401(k) plan participants difficult to administer.