After long wait, Schwab's all-ETF 401(k) platform opens for business

Dealing with fractional shares proved to be tricky, but firm thinks it has solved the problem

Feb 5, 2014 @ 12:08 pm

By Darla Mercado

The Charles Schwab & Co. Inc.'s all-ETF 401(k) platform is finally out and open for business.

The firm Wednesday announced the launch of its long-awaited exchange-traded-fund platform for retirement plans — an offering eagerly anticipated by plan sponsors and financial advisers going as far back as 2011.

At that time, Schwab announced its bid to make retirement plans cheaper and then launched its Index Advantage 401(k) — an all-index mutual fund offering — in 2012.

The road to introducing the all-ETF platform has been a rocky one, especially because Schwab has had to grapple with the difficulty of handling fractionalized shares of ETFs.

Most record-keeping platforms are built to handle mutual funds, which trade at the end of the day and which can be purchased in fractional shares. ETFs, on the other hand, trade during the day and are purchased in whole shares.

“We wanted to use [the ETFs] as intended,” said Steve Anderson, executive vice president of Schwab Retirement Plan Services.

“You have small investors contributing weekly or monthly, and that might range from $100 a pay period to a couple hundred," he said. "We want them to be fully invested.”

Without a fractionalized approach, most people would sit in cash until they had enough money to buy whole shares, Mr. Anderson said.

To solve that issue, Schwab will purchase whole shares and use its broker-dealer entity to handle the matter of fractional shares, he said.

The firm's record-keeping business will submit trades to the directed trustee where the plan assets are held in custody. Trading will occur through Schwab's broker-dealer.

“In this situation, say the plan needs 10.5 shares,” Mr. Anderson said. “We would need to buy 11 shares.”

The broker-dealer will own the residual portion of the share, and the plan will always be whole.

Ensuring that this would comply with the Employee Retirement Income Security Act of 1974 as well as banking and broker-dealer rules, was arduous, Mr. Anderson said.

Indeed, it was widely forecast that Schwab would release its ETF-based platform in the fourth quarter last year.

In October, Mr. Anderson had noted that the firm was working on a way to accommodate trading with fractional shares, and Schwab was hammering out the finer details with regulators.

When it comes to pricing, 401(k) participants can expect to see fund expenses at about 10 basis points or less. Workers can also access an option to receive customized participant investment advice via GuidedChoice or Morningstar Inc. for an additional cost of 45 basis points.

Schwab is keeping its eye on a sweet spot of retirement plans with $20 million to $1 billion in assets. Whether that will shift its target market for this ETF solution remains to be seen.

As far as concerns on habitual intraday trading by participants, Mr. Anderson said that the firm has observed “little active trading” even among its brokerage window accounts, where clients already have access to a wide array of investments.

“We see a few trades [in the brokerage window] on a quarterly basis, mostly among those participants who are most engaged,” he said. “Rarely do we see active trading.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Why broker-dealers are on a roll

Deputy editor Bob Hordt and senior columnist Bruce Kelly discuss last year's bounce-back for IBDs.

Latest news & opinion

Top 10 IBDs ranked by revenue

These independent broker dealers generated the most revenues in 2017.

8 podcasts advisers listen to when they aren't working

Listening to podcasts for the fun of it.

UBS continues to cut loans to recruits, while increasing compensation to brokers

The wirehouse reduced recruitment loans 20% and increased bonus loans 68% in the first quarter.

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print