Should ETFs be in your 401(k)?

Much to the chagrin of indexing pioneer John Bogle, there is a push for investors to include ETFs in their 401(k) portfolios. The Wall Street Journal reports (subscription required) that, thankfully, "there is one area where the products are struggling to make headway -- 401(k) retirement plans."

It seems likely that, at some point down, the road, you will have an opportunity to invest in ETFs in your 401(k). The main reason not to, and it's a very good reason, is that you are required to pay brokerage commissions on ETF trades. So if you have to pay $10 to buy and $10 to sell, that's the equivalent of a 1% front-load and a 1% back-load if you invest in chunks of $1,000 dollars at a time. It's very likely that, in a 401(k), you are investing in smaller chunks. The size of the de facto load rises as a percentage as the amount of the investment decreases. Invest $100 and you're looking at a 10% front-load, then another 10% when you sell.

Proponents of ETFs argue that they're better than traditional mutual funds because they have lower expenses. This is true, but only because most ETFs are index funds.

For investing small dollar amounts, which is the case with most regular 401(k) investors (who contribute a little each month), low-cost traditional index mutual funds look like the best bet.