Can You Use ETFs in a 401(k) Plan?

ETFs (exchange-traded funds) are everywhere in the retail investing world—so it’s natural for plan sponsors and HR teams to ask: Can you use ETFs in a 401(k) plan? The answer is generally yes. But in most employer-sponsored plans, you can use ETFs and you really don’t need to.

In a 401(k), the goal is typically long-term retirement outcomes, simple administration, and strong fiduciary process—not intraday trading flexibility. In many cases, the same investment strategy can be delivered more cleanly through mutual funds or (often at lower cost) collective investment trusts (CITs).

Yes, ETFs can be used in some 401(k) plans

A 401(k) plan can include ETFs, but whether you can in practice depends on how your plan is set up. Most 401(k) menus are built on mutual funds and/or CITs because those vehicles integrate smoothly with recordkeeping systems, participant websites, payroll feeds, and daily valuation.

ETFs trade on an exchange like a stock. That feature is the “E” in ETF—and it’s also the source of many operational hurdles in a retirement plan. Many recordkeepers can support ETFs only through specific structures, such as a brokerage window or a self-directed brokerage account (SDBA), rather than on the core lineup.

From a compliance standpoint, plan fiduciaries still must follow ERISA’s prudence and diversification standards. If you’re reviewing your overall fiduciary responsibilities, it can help to understand related plan requirements like what a Form 5500 is and why timely filing matters (see penalties for late or rejected Form 5500 audits). For regulatory background, the Department of Labor maintains extensive guidance through the Employee Benefits Security Administration at DOL EBSA.

Why most 401(k) plans don’t need ETFs

Even when ETFs are available, most plans don’t gain meaningful advantages by using them on the core investment menu. Here are the most common reasons:

• Intraday trading isn’t a retirement-plan feature. ETFs are designed to trade throughout the day. In a 401(k), participants typically transact once per day (or less frequently), and encouraging “trading behavior” can be harmful. Put plainly: day trading is bad for most retirement savers.

• Operational complexity can increase. ETFs can introduce trading spreads (the difference between bid and ask), market impact costs, and additional recordkeeping or brokerage-window administration.

• Mutual funds and CITs already cover most needs. For core asset classes (U.S. equity, international equity, bonds, target-date strategies), there are plenty of low-cost mutual funds and CITs that are easy to administer and monitor.

• CITs are often cheaper. For many plans—especially mid-size and large plans—CITs can deliver institutional pricing and lower expense ratios than comparable mutual funds or ETFs.

If you’re evaluating whether your plan is optimized for cost and fiduciary simplicity, you may also want to explore CITs directly. (You asked to link to our CIT post—please provide the exact URL/slug for that blog post and I’ll add a proper internal link with descriptive anchor text.)

When an ETF might make sense (and it’s not “because it’s an ETF”)

There are limited situations where an ETF can be a practical choice. Importantly, it’s usually not because the ETF structure is inherently better—it’s because of the strategy or the manager behind it.

For example, some advisors may like a particular ETF because:

• The ETF provides exposure to a niche strategy (for example, a specific factor, rules-based approach, or hard-to-access segment).

• The asset manager doesn’t offer that same strategy in a mutual fund or CIT.

• The ETF has a long, transparent track record and fits cleanly into the plan’s investment policy statement (IPS).

That said, the fiduciary question shouldn’t be “ETF vs. mutual fund.” It should be:

1. Is the strategy appropriate for participants?

2. Is it cost-effective net of all costs (expense ratio, spreads, trading costs, administration)?

3. Is it easy to explain and monitor?

4. Are there simpler or cheaper vehicles that achieve the same objective?

If you’re working through these decisions, consider partnering with a specialist who understands plan governance and lineup construction. Our guide on how to hire a retirement plan advisor can help, and you can also browse experienced 401(k) financial advisors who focus on employer plans.

Common ways ETFs show up in 401(k) plans

If a plan offers ETFs, it’s typically through one of these approaches:

• Brokerage window/SDBA: Participants can buy ETFs (and other securities) in a separate account. This can expand choice but may increase fiduciary oversight considerations and participant complexity.

• ETF-based model portfolios: Less common in traditional recordkeeping, but some platforms can support models that use ETFs “under the hood.”

• Custom solutions: Certain providers can integrate ETFs in specialized ways, though this is often more common in wealth platforms than mainstream 401(k) recordkeeping.

Regardless of approach, you’ll want a clear governance process. If your plan is large enough to require an audit, make sure your team understands the audit workflow and documentation expectations. See what a 401(k) audit is and when you need one and what is needed for a 401(k) audit and where to find it. You can also explore qualified firms in our 401(k) auditors directory (or browse all auditors if you sponsor multiple plan types).

Fiduciary and compliance reminders for plan sponsors

Adding any investment option—ETF, mutual fund, or CIT—triggers fiduciary responsibilities. A few practical reminders:

• Document the rationale. Keep committee minutes and due diligence notes showing why the option was selected and how it will be monitored.

• Watch total participant cost. Evaluate expense ratios, revenue-sharing impacts, trading costs (if applicable), and administrative fees.

• Confirm your plan’s bonding and reporting requirements. Many plans need an ERISA fidelity bond; learn more in What Is An ERISA Bond And How To Buy One? and compare options through ERISA bond providers.

For additional regulatory context, the IRS maintains retirement plan resources at IRS Retirement Plans.

Bottom line: You can use ETFs—but most plans shouldn’t bother

Yes, ETFs can be used in 401(k) plans—usually through a brokerage window or specialized platform support. But for most plan sponsors, ETFs don’t improve participant outcomes enough to justify added complexity. In a long-term retirement plan, the “trading” features of ETFs are not a benefit, and CITs are often cheaper while delivering the same core exposures.

If you’re considering ETFs because an advisor prefers a specific strategy, focus on the strategy first—and then choose the simplest, lowest-cost vehicle that meets your plan’s needs. If you want a second set of eyes on your lineup and governance process, start by reviewing how to hire a retirement plan advisor or browse vetted 401(k) financial advisors.

Next step: Send me the URL for your CIT blog post and I’ll update this article to include a direct internal link with descriptive anchor text in the “CITs are often cheaper” section.