Exchange-traded funds have been a glittering success for the fund industry; but in 401(k) accounts, they may lose much of their luster for investors.
   Several efforts, including a new one carrying the imprimatur of ETF giant Barclays Global Investors, seek to overcome hurdles that have so far kept exchange-traded funds, a wildly popular investment option, out of Americans' retirement plans.
   Assets of exchange-traded funds, which resemble index mutual funds but trade on an exchange like a stock, have risen nearly 35% in the past year to $466.5 billion at the end of April, according to the Investment Company Institute, a mutual fund trade group.
   But so far, ETFs have been all but excluded from employer-sponsored retirement plans such as 401(k)s, one of the fund industry's biggest repositories of customers. At the end of last year, mutual fund assets in 401(k)s amounted to $1.485 trillion, according to the ICI.
   BenefitStreet, which has about $8 billion in retirement plan assets, said it hopes to boost ETFs' presence in this market, offering a program that will bring "lower fees and more fee transparency" to defined contribution retirement plans.
   Barclays, which dominates the exchange-traded fund business with about 59% of all U.S. ETF assets, helped develop the offering. The project doesn't prevent Barclays from working with other companies that may have similar offerings, according to a Barclays spokesman.
   Among the other firms that provide ETFs to retirement plans are Invest n Retire LLC in Portland, Ore., and AST Trust Co. in Phoenix, Ariz. In addition, ETF company WisdomTree Investments Inc. (WSDT) recently launched a business unit focused on 401(k)s.
   But many investors could find that the prospect of holding ETFs in their 401(k)s doesn't offer significant advantages over conventional index funds that have been available for decades.
   One of the main problems with putting ETFs in 401(k)s has been that, unlike shares of conventional funds that can be acquired directly from fund companies, ETFs trade on the open market. This means investors pay brokerage commissions whenever they buy or sell them.
   Brokerage commissions don't matter much to investors who can put away a big lump sum and let it grow untouched for years. But in retirement plans, employees typically contribute a little out of every paycheck, meaning they buy fund shares perhaps once a month or every two weeks. In that situation, commissions could really pile up, creating a drag on investors' savings that might amount to thousands of dollars by retirement time.
   BenefitStreet solves the problem by waiting to collect buy orders from numerous investors and executing them in large block trades, which charge much lower commissions per share.
   By making just a handful of trades a day, trading costs can be split up among hundreds or even thousands of investors. Participants end up paying less than a penny a trade, according to BenefitStreet Chief Executive Jim Drury.
   The method, however, means ETF investors can only buy shares at a single price each day. That more or less corresponds to the way conventional mutual funds operate, eliminating an advantage claimed for ETFs.
   BenefitStreet competitor Invest n Retire handles the problem differently, using an automated system to execute orders in small trades throughout the day, which it says costs investors as little as 2 cents a share.
   Chief Executive Darwin Abrahamson says the system is capable of allowing participants to direct their own trades during the middle of the day, but that few do because the business is geared towards long-term investing. Abrahamson says that the firm recently examined one of its plans with 400 to 500 participants and found only one active trader among them. Overall, he says, 1% to 2% of participants in the company's plans make frequent trades.
   Holding ETFs in 401(k)s and other tax-advantaged retirement plans also scotches another one of the ETFs' big advantages: tax efficiency.
   Because ETFs use a unique mechanism to create and eliminate fund shares, they are able to avoid selling stock holdings when investors want to exit the fund. In some circumstances, those sales can be nettlesome for traditional funds. They can prompt the funds to realize capital gains that get distributed to remaining fund investors and ultimately taxed by Uncle Sam.
   But investors who hold mutual funds in tax-advantaged retirement plans such as 401(k)s don't have to worry about capital gains distributions anyway, so this feature of ETFs doesn't matter much in that context.
   One way retirement-plan investors could still benefit from access to exchange-traded funds, according to BenefitStreet and Barclays, is through ETFs' low costs. The costs of operating ETFs or mutual funds reduce investor returns.
   Still, ETFs' expense ratios aren't necessarily lower than conventional index funds. For instance, the Barclays iShares Trust S&P 500 ETF (IVV), a typical core holding, charges investors just 0.09% of assets annually in fees.
   But those low costs are matched by the Fidelity Spartan U.S. Equity Index fund, a mutual fund designed for retirement accounts that tracks the same index, and also levies 0.09% of assets annually. Moreover, investors with significant savings may have access to Fidelity's Advantage class shares, which boast even lower annual costs of 0.06% of assets.
   BenefitStreet's Drury says that while broad-market conventional funds are often available to retirement-plan investors at attractive prices, investors who are part of small 401(k) plans, such as those with less than $10 million in assets, may be precluded from owning low-cost index funds, especially those that target smaller companies or more esoteric assets.
   "There are some great index mutual funds out there," says Drury. "But we think ETFs have lower costs in the small-cap area, also in bonds and international funds."
   ETFs also allow investors to avoid early redemption fees and other trading restrictions. In conventional mutual funds, these fees can sting investors who may sell fund shares when, for instance, they switch jobs or reallocate their holdings.
   In addition, because ETFs only have one share class, whether they are offered in or out of a retirement plan, investors may have an easier time discerning what they pay to fund companies for managing their funds and what they pay to underwrite their retirement plan's overhead costs.