The exchange-traded fund (ETF) has gone from being a little-known trading novelty to a respectable investment tool, with over $400 billion in assets under management in the United States. But even as ETFs have worked their way into many portfolios, they have been left out in the cold from one of the biggest markets of all: 401(k)s. With more than $2.4 trillion in mutual fund investments tied to the 401(k) market, that is a significant market to be excluded from.

In some ways, ETFs are a great fit for 401(k)s: they tend to have lower fees than mutual funds (including index funds), while offering far greater transparency, which makes them perfect for asset allocation strategies.

However, there are significant barriers to entry. For instance, one of the chief benefits of an ETF-that it trades like a stock-is also a matter of concern for plan sponsors. Transaction costs-either from weekly automatic contributions or from active trading-have the potential to outweigh any savings from the lower expense ratios. Also, record-keeping issues arise from the fact that ETFs trade intraday like stocks, rather than having an end-of-day NAV like mutual funds. And, of course, there is always the risk of trying something new: a significant obstacle in the conservative world of retirement investments.

"ETFs don't exactly fit cleanly into the current framework," says WisdomTree Investments President and COO Bruce Lavine.

Still, folks like Lavine are getting interested.  Recently, WisdomTree formed a new business unit to promote its ETFs as 401(k) offerings, hiring Al Shemtob as director of retirement services. Shemtob was previously president of Bisys Retirement Services, where he worked (along with a predecessor firm) for 17 years.

"WisdomTree's fundamentally weighted ETFs are perfect tools for retirement investors," Lavine says.

For Lavine, the challenge is a matter of finding a way to deal with the problems around clearance, settlement and trading. He's not too worried about whether there will be demand for the products. Lavine points out that ETFs are already extremely popular with retirement investors in self-directed IRAs, so there is a market for them.

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