Many ETFs offer tax efficiency due to their structure. This is not a relevant feature in a tax-deferred retirement plan, such as a 401 (k) plan. ETFs are similar to mutual funds. If your 401 (k) options include an ETF (or any investment fund) that you consider a good option, there is no reason not to choose it.
Skrobe says there is definitely a place for ETFs in retirement plans. One of the earliest arguments usually put forward against ETFs in 401k plans is a concern based on fiduciary duty. Offering ETFs shouldn't pose any problems with fiduciary duties more than any other investment option. The fiduciary duties owed to plan participants of plan sponsors and other fiduciaries are based on the Employee Retirement Income Security Act of 1974 (ERISA).
Remember that ETFs that have dividend-paying stocks will ultimately distribute those dividends to shareholders, usually once a year, although dividend-focused ETFs may do so more often. ETFs that have interest-paying bonds will also distribute that interest to shareholders on a monthly basis, in many cases. The IRS taxes dividends and interest payments on ETFs as well as income from underlying stocks or bonds, and income is reported on its 1099 statement. For most people, investing for retirement means creating a portfolio of index funds or exchange-traded funds (ETFs).
Choose the right funds and you get excellent diversification and ultra-low costs.
