ETF's are the future....Betterment to Offer ETF-Only, Online 401(k) Plan Offering could be especially attractive to smaller employers

 "There is no question that ETF's are the future of money management.Given the vast flexibility,liquidity and cost benefits it is only a matter of time before the "real world" discovers the same fact.Millennials , in fact are at the forefront of this shift toward automated trading. Humans will eventually manage money through these vehicles.If you do not agree consider fixed commissions and human floor brokers.The only difference is that in this case you will be getting better ,for less."Edward Strafaci

Are employers ready for “robo” 401(k) plans?

In recent years, a handful of startup financial-services firms have pioneered the business of helping investors plan their portfolios entirely online. Now, a leader among these so-called robo advisers is entering the 401(k) business.

Betterment LLC on Friday said that starting early next year, it will offer companies an online-only 401(k) plan featuring a menu of 13 low-cost stock and bond exchange-traded funds from companies including Vanguard Group and BlackRock Inc.

Employees of companies that select Betterment as their 401(k) record keeper will receive the same customized investment advice that Betterment provides to investors who use its Web-based service for their individual retirement accounts and brokerage accounts. Participants will answer an online questionnaire that, among other things, asks their age, salary, net worth and goals—then will get a recommended portfolio of ETFs.

Industry analysts describe 401(k) record keeping as a low-margin business. Betterment founder and CEO Jon Stein said the privately held New York-based company—which has $2.6 billion under management—decided to take the plunge because 401(k)s are “a huge market” and the primary retirement savings vehicle for most Americans. Americans currently hold $6.8 trillion in 401(k)-style accounts, according to the Investment Company Institute trade group.

The company is aiming to serve 401(k) plans of all sizes, but its offering could be particularly attractive to smaller employers, which typically face higher charges. According to a December report by BrightScope Inc., which tracks the 401(k) market, and the Investment Company Institute, 401(k) plans with less than $1 million in assets had an average total cost of 1.6% of plan assets in 2012—the most recent year for which data is available—versus 0.33% for plans with more than $1 billion.Betterment expects 401(k) fees including the ETF expenses to range from 0.2% to 0.7% of assets annually—plus a one-time fee of about $1,500 for companies with less than $1 million in their retirement plans, said Mr. Stein.

For its retail service, Betterment charges a total annual fee of up to 0.52%, which includes advice, trades, ETF expenses and account administration.

In offering an ETF-only menu for its 401(k), Betterment joinsCharles Schwab Corp., which last year launched an all-ETF version of its Index Advantage 401(k) platform. Other companies that offer ETFs within 401(k) plans include Vanguard Group and Capital One Financial Corp.’s ShareBuilder 401(k).

With the low-cost funds, “we think we will put pricing pressure on the market” and win market share from big record keepers most of which “aren’t set up to handle ETFs,” said Mr. Stein.

While ETFs are a fast-growing segment of the financial-services industry, they have yet to catch on in 401(k) plans. They also aren’t the only option for financial-services companies and employers to offer low-cost investments within company retirement plans.

Vanguard says there hasn’t been much interest in the ETFs it offers to 401(k) plans through its Vanguard Retirement Plan Access, a platform for small companies it launched in 2011. “Very few plan sponsors have opted to include [ETFs] in their plans, because they are also offered Vanguard’s lower-cost share classes of traditional mutual funds,” a Vanguard spokeswoman said.

Meanwhile, large employers can also use collective trusts, investments that are available only in qualified retirement plans and can be cheaper than mutual funds and ETFs, said Lori Lucas, defined contribution practice leader at investment consulting firm Callan Associates.

A couple of ETFs’ biggest selling points don’t give them an edge in the 401(k) market. ETFs trade all day long like stocks, but that typically isn’t a feature that employers want to offer in retirement plans. Employers want employees “to take a long-term perspective—not to be day trading,” Ms. Lucas said.

ETFs are also tax-efficient, but that doesn’t matter in tax-sheltered retirement plans, said Brooks Herman, head of data and research at BrightScope.

Charles Schwab said it has $10 billion in its Index Advantage 401(k) platform, which includes the ETF-only investment menu and a lineup of index mutual funds that made its debut in 2012. (Schwab pairs both versions with a managed-account advice service from Morningstar Inc. and GuidedChoice Inc.) Schwab declined to say what portion of the $10 billion—which accounts for 8% of the assets on which it provides 401(k) record-keeping services—is in ETFs versus mutual funds.

“We are very pleased with the progress and adoption we’ve seen,” said Schwab spokesman Mike Peterson.

Betterment robo-advice rival Wealthfront Inc., which also has $2.6 billion under management, declined to discuss whether it has plans to enter the 401(k) market.

Write to Anne Tergesen at anne.tergesen@wsj.com