Exchange-traded funds are likely to grab a “significant” share of the 401(k) market in coming years, according to Skip Schweiss, president of TD Ameritrade Trust Co.

And TD Ameritrade plans to be part of the equation. The company has rolled out an investment program that allows plan sponsors and independent registered investment advisors to offer ETFs to 401(k) participants alongside mutual funds, collective investment funds, employer stocks and other options.

“We’re seeing a growing interest and demand in putting ETFs in retirement plans,” says Schweiss. “It fact, we’re starting to see some breakthroughs in the ability to provide them.”

Schweiss was referring to longstanding technical difficulties that have kept ETFs out of the defined-contribution arena. Legacy 401(k) recordkeeping and accounting systems are not designed to accommodate ETFs, which trade throughout the day and can only be traded in whole shares.

TD Ameritrade Trust Co. solved the problem for recordkeepers by developing a trading process that mirrors mutual fund trading and is consistent with their current procedures. The process includes the ability to trade fractional shares of ETFs.

In addition, per-share fees and transaction fees are eliminated for 401(k) plans on the TD Ameritrade Trust Company platform, which can potentially provide cost savings to plan participants and eliminate the reconciling component for recordkeepers.

TD Ameritrade isn’t the only company eyeing the market for ETFs within 401(k)’s. Charles Schwab reportedly plans to launch an all-ETF 401(k) plan in early 2012. BlackRock and ShareBuilder 401(k) are among those that already offer all-ETF 401(k) plans.

Meanwhile, TD Ameritrade is touting its open-architecture ETF capabilities as a low-cost way for plan sponsors and advisers to help differentiate themselves in the retirement-plan marketplace.

The company has seen the popularity of ETFs grow steadily as advisers and TD Ameritrade clients seek low fees and diversification. ETF usage by TD Ameritrade clients has increased more than 30% annually for the past two years, the company says. But adoption of ETFs in 401(k) retirement plans has been low, mainly due to technical challenges.

“The technical challenges have prevented [ETF use in 401(k)s] from growing, but I think it we are going to see significant inroads,” says Schweiss. “We’re hearing advisers talk quite a bit about this.”

Advisers are interested in ETFs as a way to access certain asset classes and market sectors within 401(k)s and to limit expenses for participants. Will technical hurdles falling, will ETFs eventually overtake mutual funds as the go-to investment product within 401(k)s?

“It’s hard to say,” says Schweiss. “Mutual funds have such a dominant position—but I think you’re going to see a significant share in ETFs in coming years.”

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