Schwab Offers Participants Free Advice

September 8, 2003 ( - For plan sponsors struggling with the dilemma of how to offer advice at a price that participants are willing to pay, Charles Schwab has a new proposition - free advice.

If approved by the plan sponsor, participants in plans serviced by Schwab Retirement Plan Services will now have access to customized advice either online, by phone, or in person – including specific recommendations among the core investment fund choices available in a retirement plan – courtesy of an arrangement with San Jose, California-based GuidedChoice.   In addition, participants will also have the option to elect automatic account rebalancing.

Personal Preference?

Participants that prefer a personal interaction can work directly with Schwab investment advisor representatives to access the advice, according to Schwab.   Regardless of how they access the advice, however, they will receive consistent, asset allocation and investment recommendations from GuidedChoice’s GuidedSavings solution.

  Many recordkeepers and fund management companies have latched on to the necessity of advice, but are still inclined to attempt to get either the participant or the plan sponsor to pay for it. The advice engines themselves once had grand illusions (and multiples) about millions of annual fees from participants but those dreams have foundered, and the remaining few players in the space – led by Financial Engines and Morningstar’s Clear Future, which recently inhaled MPower (see  Morningstar Bulks Up with mPower Acquisition ) – have tended to focus on forging relationships with recordkeepers and fund companies, which then take the advice product to their clients and look to find a way to get paid for it. Some of these offerings, particularly when restricted to Internet-only access, are free to the end-user, but most vendors – in these difficult times – have shied away from adding to their own costs without looking to pass these costs on.

“The Right Thing”

This will be harder to do with the Schwab approach in the market. “Participants need advice, plan sponsors need it, and thus we need to offer it. Charging for it gets in the way of it being used – it’s that simple,” Walt Bettinger, who heads up Schwab Retirement Services, told . The business logic behind the decision is equally simple, says Bettinger. “There are two ways to look at this – we are either increasing our costs as a vendor, or we are making an investment in our DC book of business. It’s the latter – we looked at this exactly as we looked at open architecture. The marketplace will reward us for doing the right thing.”

The right thing, Bettinger says, is to provide the Guided Choice tool for free and give participants access to it in any medium they want. Other than its fee to Guided Choice, which Schwab officials will not disclose, Schwab will be incurring costs to upgrade its ability to put properly-trained staffers at the disposal of participants, both in person and at the call centers. “We are offering best of class without the costs associated with it,” he says.

Schwab's new partner has an impressive utilization track record, certainly compared with current published industry benchmarks.   According to Schwab's Mike Peterson, an average of 70% of participants who have been offered GuidedChoice get all the way through the process and actually receive advice.   That, in and of itself, is no small accomplishment - a November 2002 survey by the National Retirement Planning Coalition (NRPC), a group of financial industry and advocacy organizations, found that nearly half (41%) of some 500 survey respondents hadn't been able to complete such a calculation (see  Survey: Americans Unable, Unwilling to Complete Retirement Projections ).   

However, the lowest usage rate GuidedChoice has experienced is 30% - and the highest, 100%.   Additionally, companies that have implemented advice solutions from GuidedChoice as part of their defined contribution plan have seen savings rates rise 100 - 110% (oddly, if there is a defined benefit plan, savings rates increased "just" 30 - 40%, depending on the plan design).  

The product has also had an impact on the all-important rate of participation as well, and the lower the current participation rate, the greater the impact, according to Schwab.   For example, in plans with less than 60% participation, participation has increased to 75%, while in plans that already enjoy participation rates of 75% or higher, participation has increased approximately 10%.

Plan sponsors curious about the methodologies used by San Jose, California-based GuidedChoice might be interested to know that the team of advisors responsible for overseeing the development of the advisory software and investment solutions is led by none other than Harry M. Markowitz, Ph.D., the Nobel laureate for Modern Portfolio Theory. Dr. Markowitz is actively involved in the day-to-day development and refinement of the analytical software that drives the GuidedChoice suite of products, according to GuidedChoice.

The effort marks something of a rebound for Schwab, restressing its commitment to a business tthat lost some of its bounce this last year, not least when Schwab cut its own 401(k) match, which the market latched on to - soon the rumor was in the air that Schwab was reassessing its whole DC effort. Not so, says Bettinger. "We intend to change this industry, as we've changed others. We don't see a downside."