Many ETFs offer tax efficiency due to their structure. This is not a relevant feature in a tax-deferred retirement plan, such as a 401 (k) plan. ETFs are similar to mutual funds. If your 401 (k) options include an ETF (or any investment fund) that you consider a good option, there is no reason not to choose it.
Skrobe says there is definitely a place for ETFs in retirement plans. But it's possible to invest in ETFs on your 401 (k), and some providers have made progress over the past five years. ETFs trade closer to stocks than to mutual funds. Most 401k platforms are based on the premise of mutual fund trading and daily valuation.
Because ETFs trade closer to stocks, they generate commissions when traded and have potentially higher valuation swings at any given time. A 401k plan and its platform must determine how to reduce these fees so that the low expense ratio becomes a benefit to participants and is not compensated by trading costs, while the plan can be managed in a system built for mutual funds. As the decade draws to a close, ETFs have more than four times that amount, according to the Investment Company Institute. Dan Egan, director of behavioral finance at online investment firm Betterment, says one thing that prevents other providers from switching from mutual funds to ETFs is how they get paid, partly through commissions from mutual fund companies.