Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

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Zillions
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Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Zillions »

I've spent enough time here now to know that I am only going to invest in index funds for the rest of my investing life. However, what is frustrating is why NONE of our former employers and my husband's current employer did not / is not offering ETFs but only mutual funds? I understand that it doesn't really matter in tax deferred accounts or in a ROTH 401K but I want to make sure that I haven't missed anything here. Is there any particular reasons our employers may have only offered mutual funds and never ETFs or bonds or stocks (although we wouldn't be buying any individual stocks or bonds henceforth)?
Normchad
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Normchad »

Not exactly sure, but I'll take a guess.

The plan offerings are often recommended by a third party; i.e. your employer doesn't necessarily pick the offerings. This is because they are not actually qualified to make those choices, and don't want to have liability if you try to sue them later.

I can't fathom a guess why they don't seem to offer ETFs though, that is a good question.

Today though, a lot of plans do offer a "Self directed account"; which will basically let you buy whatever you want. For example, in my plan, I can keep 80% of my plan assets at TDAmeritrade in a self directed account. And I am free to buy whatever I want that account (so long as it's available via TDA). That is where I buy my VG bond funds, etc.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by dukeblue219 »

I can imagine that timing would be tricky with 401k purchases of ETFs. When would the fund place orders, and who would pick bids/asks for the order if it's not just a big market order? I'm certain there's a solution, but with funds that's a little easier since it's all bundled at end of day pricing set by fund.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Normchad »

AlohaJoe wrote: Thu Jun 11, 2020 10:18 pm You can Google this and find many explanations. These are the top results for my Google query.

https://seekingalpha.com/article/418451 ... much-sense

https://www.etf.com/publications/etfr/e ... nopaging=1

https://401kspecialistmag.com/401k-plan ... ffer-etfs/
Thanks AlohaJoe, those are good reads. This probably explains most of it right here:

Mutual funds allow investors to buy in amounts down to the thousandths of a share, so making a $50 investment every two weeks isn't a problem. ETFs, on the other hand, have to be purchased in whole shares. The Vanguard S&P 500 ETF trades at around $250 per share. An individual making $65,000 per year has to save 10% of their salary in order to be able to buy just one share every two weeks. That's not going to work for a lot of people. If someone only saves $100 every two weeks, would they need to wait for a month and a half until they have enough to buy one share? Where does the money go in the meantime? There are a lot of logistical issues to consider; issues that don't exist when using mutual funds.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by retired@50 »

I think workplace retirement plans are already too confusing for many. Why else would we see so many questions from posters who have done things like ignore their 401k plan for a decade or more.

The simpler and more automatic these plans and options can be made, the better in my opinion. If you were starting with a blank sheet of paper I doubt you'd come up with 401k, 403b, 457, SEP-IRA, Keogh, solo-401k, Roth IRA, etc. It's mind bending and confusing for the novice investor.

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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by stimulacra »

Ask the employer or your HR head. I've worked for smaller firms and the funds available were usually options that the principals preferred and requested for with some window dressing recommendation by the provider or advisor that usually came with load fees or commissions.

Usually it was a matter of picking the least worst option and balancing the allocation elsewhere outside the 401k.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Katietsu »

Zillions wrote: Thu Jun 11, 2020 10:06 pm I However, what is frustrating is why NONE of our former employers and my husband's current employer did not / is not offering ETFs but only mutual funds?
Out of curiosity, why is this frustrating to you?
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by kenbt »

Might want to look into rolling former jobs funds to an IRA rollover.

From the Vanguard site.
"An employer-sponsored plan, such as a 401(k) or 403(b), you can initiate a rollover—typically, when you change jobs or retire."
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by dcabler »

I've only had one employer who had a self-directed option. It was at Fidelity and allowed for up to 90% of my 401K to be in the self directed bucket. At the time, it was a little painful because it required me to deposit into a cash account in the non-self-directed portion, then move it to the self-directed portion and then manually purchase the mutual fund I wished. I've heard they've streamlined it a bit since I was there. Then there was the restriction we had - only mutual funds available through Fidelity, including some non-Fidelity funds. But no ETFs and no stocks.

With all of my other employers, I have done the best I could with what they had available, but I immediately roll them over into my IRA at Fidelity once I leave. At this point in my life, it's getting close to noise: only about 3% of my total holdings are at my current employer's 401K and I don't expect it to get all that much bigger, as a percentage, before I retire and roll it over. I have a couple of other tax advantaged accounts where I do the best I can with what's available, such as my HSA which I'll also move over to Fidelity when I retire. I also have a deferred comp plan from a previous employer, currently in payout mode, and I dutifully take the money I receive each January and deposit it back into my Fidelity taxable account. Only 2 more years of that and it's empty, thank goodness.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by atdharris »

My employer only offers a fixed number of mutual funds as well. Thankfully, they do offer Fidelity index funds with low ER along with other higher fee funds, but I can avoid those as long as I don't pick the "designed" portfolios they offer. I believe UBS manages our accounts.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by nisiprius »

Don't expect your employer to offer the exact investment you like any more than you should expect them to offer your exact favorite snack in the vending machine.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Ice-9 »

My workplace's plan technically only offers mutual funds, as you described.

However, they also offer a self-directed brokerage window, which at Fidelity is called BrokerageLink. There, I can buy any ETFs, individual stocks, individual bonds, and even most mutual funds I want. It's basically like a taxable brokerage account at Fidelity, but inside my workplace plan.

So, I recommend asking your human resources benefits person if your plan offers a self-directed brokerage window. They may only offer it to people who ask, and require a separate form acknowledging you're going outside their plan offerings.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by mmmodem »

My employer and ex-employer offers better institutional funds with lower fees. I ask the opposite question. Why can't I access these funds outside of the 401k?
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Stinky »

retired@50 wrote: Thu Jun 11, 2020 11:31 pm I think workplace retirement plans are already too confusing for many. Why else would we see so many questions from posters who have done things like ignore their 401k plan for a decade or more.

The simpler and more automatic these plans and options can be made, the better in my opinion.
This is so true.

I sat on the Retirement Committee of my former employer that oversaw the 401(k) plan. I brought up the possibility of a brokerage window many times, only to be shot down by the HR team. The HR folks saw that the employees in the trenches were already confused by the 15 or so mutual funds offered, and didn’t want to add to the confusion with a brokerage option.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by mhc »

My company only offers CITs and self-directed. The CITs are extremely low cost index funds. They are great. In my opinion, they beat MFs and ETFs. I have never used the self-directed because the CITs are so great.

CIT = Collective Investment Trust
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by sport »

mmmodem wrote: Fri Jun 12, 2020 9:06 am My employer and ex-employer offers better institutional funds with lower fees. I ask the opposite question. Why can't I access these funds outside of the 401k?
You probably can access those funds if you have enough money to meet the minimum investment. The minimum might be $100 million per fund.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by abuss368 »

The risk is too great to the retirement of many people because they : 1) don't know what they are doing, 2) don't want to learn, and 3) speculate.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by sport »

stimulacra wrote: Fri Jun 12, 2020 1:27 am Ask the employer or your HR head. I've worked for smaller firms and the funds available were usually options that the principals preferred and requested for with some window dressing recommendation by the provider or advisor that usually came with load fees or commissions.

Usually it was a matter of picking the least worst option and balancing the allocation elsewhere outside the 401k.
I was on the "401k Committee" at the small company I worked for. The plan provider offered a limited selection of funds for us to choose from. The company had a local law firm provide investment guidelines. Those guidelines were not very good, but we had to follow them. The company probably wanted this to protect themselves against employee lawsuits. So, we looked at the offerings, applied the guidelines, and then chose a reasonable selection of funds. These choices were only "recommendations" and the company management decided whether or not to follow them (they always did). So, the committee members could not be held liable. There were no load funds or commissions involved. ERs were not extremely high, but they were not Vanguard type numbers either.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by dougger5 »

nisiprius wrote: Fri Jun 12, 2020 8:55 am Don't expect your employer to offer the exact investment you like any more than you should expect them to offer your exact favorite snack in the vending machine.
Very well-put :beer

Caused my transom so spawn numerous other examples; such as health care plans, computer platforms, room temperature, and so on...
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general question).

Also, Roth is a name, not an acronym (ROTH). See the wiki: Roth IRA
Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by CyclingDuo »

Zillions wrote: Thu Jun 11, 2020 10:06 pmI've spent enough time here now to know that I am only going to invest in index funds for the rest of my investing life. However, what is frustrating is why NONE of our former employers and my husband's current employer did not / is not offering ETFs but only mutual funds? I understand that it doesn't really matter in tax deferred accounts or in a ROTH 401K but I want to make sure that I haven't missed anything here. Is there any particular reasons our employers may have only offered mutual funds and never ETFs or bonds or stocks (although we wouldn't be buying any individual stocks or bonds henceforth)?
About 25% of plans offer a brokerage window option (usually through Schwab or another firm) where you can buy stocks, bonds, mutual funds, ETF's, CD's, bonds, etc... . Typical cost includes an annual administrative fee and depending on the plan, may have higher transaction costs. You usually have to dig around rather deep to even find the plan at the company where you are working if they offer one.

https://www.investopedia.com/terms/b/br ... window.asp

https://www.investopedia.com/articles/p ... counts.asp

https://www.thebalance.com/401k-plans-w ... ow-4585206

https://www.finra.org/investors/insight ... e-3-things

https://www.bankrate.com/investing/risk ... ge-window/

Our plans do have them, but we do not use them due to the costs involved. We already have taxable brokerage accounts, so need to add any more complexity to our already mixed bag.

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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Dottie57 »

abuss368 wrote: Fri Jun 12, 2020 10:46 am The risk is too great to the retirement of many people because they : 1) don't know what they are doing, 2) don't want to learn, and 3) speculate.
4) trading frequently in a retirement account - goes with speculation.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by abuss368 »

Dottie57 wrote: Fri Jun 12, 2020 1:07 pm
abuss368 wrote: Fri Jun 12, 2020 10:46 am The risk is too great to the retirement of many people because they : 1) don't know what they are doing, 2) don't want to learn, and 3) speculate.
4) trading frequently in a retirement account - goes with speculation.
Agree!
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by abuss368 »

sport wrote: Fri Jun 12, 2020 10:50 am
stimulacra wrote: Fri Jun 12, 2020 1:27 am Ask the employer or your HR head. I've worked for smaller firms and the funds available were usually options that the principals preferred and requested for with some window dressing recommendation by the provider or advisor that usually came with load fees or commissions.

Usually it was a matter of picking the least worst option and balancing the allocation elsewhere outside the 401k.
I was on the "401k Committee" at the small company I worked for. The plan provider offered a limited selection of funds for us to choose from. The company had a local law firm provide investment guidelines. Those guidelines were not very good, but we had to follow them. The company probably wanted this to protect themselves against employee lawsuits. So, we looked at the offerings, applied the guidelines, and then chose a reasonable selection of funds. These choices were only "recommendations" and the company management decided whether or not to follow them (they always did). So, the committee members could not be held liable. There were no load funds or commissions involved. ERs were not extremely high, but they were not Vanguard type numbers either.
It is amazing how many layers, consultants, and other input influences a plan formation and process.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Stinky »

abuss368 wrote: Fri Jun 12, 2020 1:22 pm
sport wrote: Fri Jun 12, 2020 10:50 am
stimulacra wrote: Fri Jun 12, 2020 1:27 am Ask the employer or your HR head. I've worked for smaller firms and the funds available were usually options that the principals preferred and requested for with some window dressing recommendation by the provider or advisor that usually came with load fees or commissions.

Usually it was a matter of picking the least worst option and balancing the allocation elsewhere outside the 401k.
I was on the "401k Committee" at the small company I worked for. The plan provider offered a limited selection of funds for us to choose from. The company had a local law firm provide investment guidelines. Those guidelines were not very good, but we had to follow them. The company probably wanted this to protect themselves against employee lawsuits. So, we looked at the offerings, applied the guidelines, and then chose a reasonable selection of funds. These choices were only "recommendations" and the company management decided whether or not to follow them (they always did). So, the committee members could not be held liable. There were no load funds or commissions involved. ERs were not extremely high, but they were not Vanguard type numbers either.
It is amazing how many layers, consultants, and other input influences a plan formation and process.
In my company, we had HR, various senior leaders, Fidelity (as both administrator and investment advisor), inside legal, and outside legal. All headed up by the corporate CFO.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by abuss368 »

Stinky wrote: Fri Jun 12, 2020 1:34 pm
abuss368 wrote: Fri Jun 12, 2020 1:22 pm
sport wrote: Fri Jun 12, 2020 10:50 am
stimulacra wrote: Fri Jun 12, 2020 1:27 am Ask the employer or your HR head. I've worked for smaller firms and the funds available were usually options that the principals preferred and requested for with some window dressing recommendation by the provider or advisor that usually came with load fees or commissions.

Usually it was a matter of picking the least worst option and balancing the allocation elsewhere outside the 401k.
I was on the "401k Committee" at the small company I worked for. The plan provider offered a limited selection of funds for us to choose from. The company had a local law firm provide investment guidelines. Those guidelines were not very good, but we had to follow them. The company probably wanted this to protect themselves against employee lawsuits. So, we looked at the offerings, applied the guidelines, and then chose a reasonable selection of funds. These choices were only "recommendations" and the company management decided whether or not to follow them (they always did). So, the committee members could not be held liable. There were no load funds or commissions involved. ERs were not extremely high, but they were not Vanguard type numbers either.
It is amazing how many layers, consultants, and other input influences a plan formation and process.
In my company, we had HR, various senior leaders, Fidelity (as both administrator and investment advisor), inside legal, and outside legal. All headed up by the corporate CFO.
That is crazy but unfortunately I fear very common.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by firebirdparts »

I went to work for Kodak in 1984, who had originally come up with the idea of the 401k, and in those days you could pick "stocks" or "bonds." In either case you had a mutual fund of mutual funds, and these were obviously managed by somebody so designated just for our 401k (it was a big company). I think generally the idea of mutual funds is "traditional" at this point. it's traditional because it's suitable. Until recently, there were trading costs, and for sure, you don't want stocks and ETFs if you're paying for trading costs for 100,000 people. Not to mention the loss of productivity if you are going to tell people they can manage this in the office. They force you to be a long term investor. That is also suitable.

It evolved a ton over the years, but amazingly, in my current 401k we just recently got 2 new mutual funds of mutual funds which are obviously custom made. I don't know who picks our funds, but they are obviously an investing enthusiast.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by donaldson »

My employer's plan offers the ability to access ETFs, individual stocks, etc. through a self-directed brokerage account. I'm not sure how common that option is at other workplaces.

I looked into it, but the additional fees and the hassle of having to constantly move funds from one account to the other (you can't have your contributions sent directly to the SDBA) made it not worth it to me.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by zonto »

My wife's former employer only offers mutual funds within the 401(k), which is to be expected. They use Fidelity as the provider and offer BrokerageLink access. What irks me is that there is also a mutual-fund-only restriction within the BrokerageLink account as well...

My employer also uses Fidelity and offers BrokerageLink access, but has no BrokerageLink restrictions for stocks/ETFs (as it should be, considering that's kind of the point).
Last edited by zonto on Fri Jun 12, 2020 3:46 pm, edited 1 time in total.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by mervinj7 »

mmmodem wrote: Fri Jun 12, 2020 9:06 am My employer and ex-employer offers better institutional funds with lower fees. I ask the opposite question. Why can't I access these funds outside of the 401k?
You can at Fidelity. They lowered the minimums on their institutional premium index funds to zero two years ago. I believe the old minimum was $100M.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by Zillions »

Between us, we've only worked for about 5 companies, one of which did not offer a 401K.

My husband's current employer does offer the brokerage option but limits it to 50% of total account value AND he can / could only pick MORE mutual funds - no stocks, bonds or ETFs, not even Vanguard's.

Before we converted to Bogleheadism, we had amassed several different mutual funds between us. After our conversion, we both moved from multiple funds to the 3 fund ETF portfolio in all of the former rollover IRA accounts but are stuck with only the mutual funds in his 401K. I guess it doesn't really matter anymore with the 3 fund portfolio being in Vanguard mutual funds and not in ETFs but it makes no sense to me because if you offer Vanguard indexed mutual funds in your 401K then why not also offer Vanguard indexed ETFs??
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by LadyGeek »

Remember that you are contributing a fixed number of dollars into your employer plan. Mutual funds can do that very accurately, as you can buy the exact number of shares needed, e.g. 123.456 shares.

ETFs, however, cannot. See the wiki: ETFs vs mutual funds - Bogleheads (Fractional shares)
ETFs can only be bought in whole share amounts. Typically, this results in small amounts of cash left over uninvested, which can be an annoyance. When starting with a dollar amount, one has to calculate the number of shares they can buy before placing an order.

Some brokers allow investors to purchase fractional ETF shares. Bear in mind that if you decide to move your account to another broker which does not support fractional shares, you may have to sell your fractional shares and pay a tax on the gain.[2]

Mutual funds can be bought and held in any fractional number. The order can be specified as either dollars or number of shares, and there are no leftover amounts.
According to Google (etf fractional shares 401(k) - Google Search), offering ETFs in a 401(k) plan is making inroads, but it will take a while.

- 401(k)s are the ‘pot of gold’ ETFs haven’t yet cracked — but that could change in the next decade, from MarketWatch
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by nisiprius »

Apparently Fidelity is offering fractional shares of ETFs. I think Schwab was only doing it only for "stocks in the S&P 500?"

Fractional shares
Stocks by the Slice(SM) makes dollar-based investing easy. Own a slice of your favorite companies and exchange-traded funds (ETFs) based on how much you want to invest....

Trade US stocks and ETFs for as little as $1.00 and with no dollar maximum per order....
That would seem to remove one impediment to including them in 401(k) plans.

Schwab: Fractional shares
Now anyone can own any of America's leading companies in the S&P 500® for as little as $5, even if their shares cost more.
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Re: Why have our employers only offered mutual funds (and not stocks / bonds / ETFs)?

Post by livesoft »

Mutual funds have a mechanism to pay the custodian to include their funds in the platforms. The mechanism might be the 12b-1 fees or front-end / back-end loads.

ETFs, stocks, and individual bonds do not have those mechanisms.

Therefore, mutual funds will generally be cheaper for the custodian and the employer to implement because the costs are readily passed on to the participants in a ways that the participants cannot readily calculate.

And historically, ETFs did not exist anyways, so there is a long history of using mutual funds with fees.

Only in the past few years have index funds started appearing in 401(k), 403(b), and other employer-sponsored plans. Low fees for participants has not really been a hallmark of such plans. Low or no fees for the employer has always been something employers like.
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