The 401(k) market is largely dominated by insurance and investment companies who are incentivized to offer certain mutual funds. Often, they are compensated in some way by the mutual fund company, which usually comes in the form of revenue-sharing arrangements.
ETFs, on the other hand, generally cannot have the same revenue-sharing relationships that many mutual funds do. That means the 401(k) providers who use ETFs aren’t being compensated behind closed doors, so they have to charge explicit fees for their services. This helps make it easier for plan sponsors to evaluate, compare, and understand the true costs of administration. And it allows participants to see where their money is going.
In addition to having lower fees, ETFs provide more liquidity, are more tax-efficient, and rely on passive investing rather than active investing—which tends to get better results.
Learn more about the differences between ETFs and mutual funds.