“In 2012, we successfully launched Schwab Index Advantage, designed to help workers better prepare for retirement using low-cost index mutual funds and personalized advice. We are now launching an additional version of Schwab Index Advantage with the goal of further driving down investment costs by using low-cost exchange-traded funds,” says Steve Anderson, head of Schwab Retirement Plan Services.
“This is a philosophical shift,” Anderson tells PLANSPONSOR. “It minimizes cost and maximizes personal investment and advice.” Anderson also believes the solution’s attractiveness to plan sponsors will be philosophical in nature, with those who believe providing advice as well as low-cost investments is important drawn to the product. Schwab Retirement Plan Services administers plans from $20 million to more than $1 billion in assets.
Anderson estimates a 401(k) plan using index ETFs can reduce investment expenses by more than 90% compared to a typical 401(k) plan that primarily uses actively managed mutual funds, and by more than 30% compared to a 401(k) plan that uses index mutual funds.
This is the first time Schwab is offering ETFs as part of a retirement plan platform; the original Index Advantage platform did not include ETFs. Anderson explains, “We wanted to offer them in their purest sense.” He says Schwab believes offering a mix of mutual funds and ETFs can be confusing to participants due to different timing for trade settlements, and it mixes investment expenses.
ETFs offer a number of benefits to investors that will now be available through Schwab Index Advantage, including low investment costs, a broad range of asset classes, transparency and timeliness of trades. Many solutions on the market today unitize shares, batch trades, trade only once a day at a single price, or require individuals to open a self-directed brokerage account to access exchange-traded funds. “We believe a truly effective offering requires the ability to invest in and receive allocations of both full and partial shares of exchange-traded funds when the market is open, and that’s what we’ve built,” Anderson said in the product announcement. “Even smallest investor can be 100% invested with each payroll,” he tells PLANSPONSOR.
Anderson notes that some industry players suggest offering exchange-traded funds to 401(k) participants will lead to over-active trading.
Dave Gray, vice president of client experience for Charles Schwab, spoke with PLANSPONSOR last year about intraday investing, in anticipation of Schwab’s release of the all-ETF platform: “We don’t see the premise as day trading. We don’t think it promotes participant day trading. We look at participant behavior,” Gray said. “We look at the participants through our self-directed approach, and most use ETFs in a buy/hold strategy. They trade a few times per quarter. They aren’t day trading, so we don’t accept the premise of day trading. We don’t think day trading is a concern.” (See “Schwab’s All-ETF Retirement Plan”.)
Anderson also contends mutual fund companies have largely ignored ETFs because they lack the capabilities on their recordkeeping platforms, and some people suggest because the industry is dominated by mutual funds, ETFs have trouble penetrating the market (see “Running the Fund: Changing Plans”). “We believe in challenging the status quo and investing our resources to help drive positive change and contribute to better outcomes for hard-working Americans,” Anderson says.
With the all-ETF platform, employers and their retirement plan consultants can build a diversified investment fund lineup, choosing from roughly 80 low-cost index ETFS Schwab makes available. The funds represent more than 25 asset categories from providers including Charles Schwab Investment Management, ETF Securities, First Trust, Guggenheim Investments, Invesco PowerShares, iShares ETFs, PIMCO, State Street Global Advisors, Van Eck Global, Vanguard and United States Commodity Funds.
Anderson explains that the firm first looked at asset categories appropriate for 401(k)s, and identified 27 different categories. It then researched the market to find funds that by Morningstar standards are index ETFs, with low cost and sufficient assets under management (AUM), to see which would fit into the platform. There were about 100, which Schwab pared down to 78, with 11 different fund families involved. “We will continue to look at that; there could be changes or expansion in the future,” Anderson says.
As with the index mutual fund version of Schwab Index Advantage (see “Charles Schwab Launches 401(k) Plan Solution”), the exchange-traded fund version builds in a low-cost personalized savings and investment strategy through independent third-party advisory services provided by either GuidedChoice Asset Management, Inc., or Morningstar Associates, LLC. Participants in the managed account advisory service receive ongoing investment management based on a variety of factors including their age, income, account balance and savings rate in their 401(k) plan. Those who prefer to manage their account themselves can do so using either the ETFs provided under the plan, or by opening a self-directed brokerage account if their employer offers this feature in the plan.
“We believe, with the momentum ETFs have garnered in the marketplace in the last six to 10 years, it’s a mistake to ignore them for the retirement plan industry,” Anderson concludes. “We’ve had 30 years where mutual funds have been the dominant player, and it is time to challenge thinking and see where 401(k)s can go in the future.”
Employers interested in learning more about Schwab Index Advantage should visit http://rethinkyour401k.com or call Schwab at 877-223-7036.
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