Why ETFs Are a Great Fit for 401(k) Plans

By ShareBuilder 401k

While Exchange-Traded Funds (ETFs) have become the popular choice in investing over the last several decades, ETFs are far from common in 401(k) plans. The benefits of ETFs offer real opportunities for your 401(k) plan:

  • Low fund expenses – ETFs / index funds tend to offer lower expenses than mutual funds and insurance products. Lower expenses enables more of your money to stay invested in the markets.
  • Access to not only major asset classes, but also to important sub-asset classes – Be it a tech sector fund like QQQ, a popular index like the DOW, or commodities, gold, TIPs, or ESGs, ETFs can provide access to diverse asset classes that may be tougher to do with mutual funds.
  • ETFs are index funds and index funds have typically outperformed the majority of actively managed mutual funds over the long-term (see the chart below for details). Know there are course are no guarantees in future performance.

What Are Exchange-Traded Funds (ETFs)?
Exchange Traded Funds (ETFs) are a basket of stocks, bonds, or commodities that typically track a market index such as the S&P 500 or the Dow Jones Industrial Average.

An ETF is similar to a mutual fund in that they both work to diversify risk by holding a collection of stocks and/or bonds. However, an ETF is a security that can be traded throughout the day just like a stock on the major exchanges. A mutual fund’s net-asset value is calculated at the end of each day and shares are redeemed once a day at this price. ETFs almost always track an index. ETFs can have lower overhead and the ability to issue shares, which can lead to lower expense ratios than even index mutual funds.

ETFs and the ShareBuilder 401k Fund Philosophy
Our goal at ShareBuilder 401k is to empower 401(k) savers with the right fund options at the least amount of expense. We believe this gives participants more control in reaching their financial goals.

Core fundamentals that drive our fund line-up selection are straightforward:

  • Costs matter: low-expense funds can help your money work harder
  • Diversification of your money (assets) is critical: having all your eggs in one basket is a bad idea
  • Investing is a long-term proposition: following short-term trends is not an investment strategy

This is what led us to pioneering an all-ETF based offering in 2005. And as we’re not a fund provider, we take an unbiased approach to analyze, monitor, and select the ShareBuilder 401k fund lineup.

Strong Historical Performance and Low Expenses
Across major asset categories, the benchmark indices have historically beaten a very high percentage of actively managed mutual funds.

Performance of Benchmark Index versus Actively Managed Funds
This may be part of the reason why ETFs continue to gain in popularity. According to the Investment Company Institute from a 2022 report, ETFs netted $942 billion in 2021. In comparison, mutual funds lost steam, with 2021 outflows coming in at $29 billion.

Lower Expense Ratios
ETFs expense ratios are typically lower than even index mutual funds expense ratios.
Index Funds versus Managed Funds Expense Ratio Comparison
ETFs not only cover major market indices like the S&P 500, NASDAQ, treasury bonds, and more, but also track many specialty categories not always found in retirement plans, such as Treasury Inflation-Protected Securities (TIPs), Emerging Market Bonds, Commodities, and more. View our ETF line-up to get a feel for a robust 401(k) roster designed for helping build your nest egg.

The Impact of Lower Fund Costs Can Be Dramatic
Just 1% of additional fees can take a big chunk from your nest egg. Consider a hypothetical situation of two investors, Dan and Jill. Both earn $75,000 a year with a 3% annual raise and receive a 7% annual return on their investments. The only difference is that Jill pays 1% in fees while Dan pays 2%.

The effect of higher costs compounds and becomes profound over time. In 40 years, Jill will have accumulated 27% more than Dan, a difference of $376,000.
Paying 1% Less Can Make A Big Difference for Your Retirement Savings

To learn more about other 401(k) business and participant costs, try Understanding 401(k) Costs.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.