Schwab, Morningstar partner on 401(k) managed accounts

Schwab Retirement Plan Services is trying to get advisers more involved in 401(k) managed accounts through a new service for customized fund selection and portfolio construction for participants.

Schwab Retirement Plan Services, the 401(k) arm of Charles Schwab Corp., is trying to get advisers more involved in 401(k) managed accounts through a new service for customized fund selection and portfolio construction for participants.
Through the service, advisers use funds from a plan’s core investment menu — mutual funds, collective investment trust funds and exchange-traded funds — to develop a slew of managed account portfolios in which participants are placed based on individual data points and methodology developed by the adviser.
The service, called adviser managed accounts, allows 401(k) plan advisers to serve as a Section 3(38) investment fiduciary under the Employee Retirement Income Security Act of 1974. It leverages the technology Morningstar Associates, the RIA unit of Morningstar Inc., uses in its managed accounts.
The approach differs from other popular managed-account products on the market, such as those offered by Financial Engines and Morningstar, which serve as the registered investment adviser rather than the plan adviser in the managed account. Schwab already offers participants managed accounts provided by Morningstar and GuidedChoice Inc.
“The adviser is the lead player in the portfolios,” said Steve Anderson, president of Schwab Retirement Plan Services.
HOW IT WORKS
Managed accounts generally provide a more customized alternative to target date funds by tailoring participants’ asset allocation based on individual data points. Through Schwab’s new service, advisers can build up to 101 separate managed account portfolios, depending on the level of variation the adviser wants from portfolio to portfolio, from conservative to aggressive.
The service assigns participants to a particular portfolio based on payroll and record-keeping data points — age, income, savings rate, account balance, state in which a participant lives, gender and Social Security projections, for example. Participants can add extra data, such as other account balances or change their anticipated retirement age.
Advisers develop the methodology and criteria — within the parameters of the Morningstar technology — by which a participant is assigned to a particular portfolio. On a quarterly basis, the service provides portfolio rebalancing for participants and assesses whether they’re still in an appropriate portfolio.
Aside from acting as record keeper, Schwab provides participant education, call center support, website, and interfacing with plan sponsors and consultants.
“We make this very scalable for the advisers,” Mr. Anderson said.
All-in fees for the service, including the adviser and managed account fees, are likely around 40 to 50 basis points, right around where competitors tend to sit, Mr. Anderson said. MassMutual Retirement Services recently launched a new managed account with Envestnet Retirement Solutions, which costs around 50 bps, for example.
The fee is based on the size of the 401(k) plan and what the plan adviser charges for building the portfolios. Advisers have flexibility to charge at the plan or participant level.
Schwab only does record keeping for plans with more than $20 million in assets.
“This gives advisers a way to monetize relationships in a new way,” said Grant Easterbrook, co-founder of 401(k) start-up Dream Forward Financial and a former financial technology analyst. “You’d be able to monetize in a new role as a 3(38) [fiduciary].”
Serving as a 3(38) fiduciary is a growing area for plan advisers, Mr. Easterbrook said. Legal pressure around high plan fees and conflicts of interest, as well as the potential regulation on investment advice from the Labor Department, make advisers with an enhanced fiduciary role more appealing, Mr. Easterbrook said.
COMPETITIVE ADVANTAGE
Schwab’s service seems to provide a leg-up on other managed account providers in the 401(k) industry, Neil Bathon, managing partner at FUSE Research Network, said.
“I think [customization] is becoming more of a thing across the investment management industry,” Mr. Bathon said. “Not offering the ability to personalize the solution for the participant would be a serious competitive shortcoming. It’s going to be a basic requirement, but right now it’s a competitive advantage [for Schwab].”
But that advantage might not last long. Some asset management clients of Mr. Bathon’s are on the verge of releasing what seems to be similar managed account capabilities, perhaps as soon as six months from now. He declined to name the specific firms.