Charles Schwab fires latest salvo in low-cost TDF war

The firm's new target-date mutual funds beat out Fidelity and Vanguard funds in price by two basis points

Aug 25, 2016 @ 8:00 am

By Greg Iacurci

Charles Schwab Corp. has upped the ante in the push to be the lowest-cost provider of target-date retirement funds, launching a new series of target-dated mutual funds on Thursday that edge out Vanguard Group and Fidelity Investments to claim the title as cheapest on the market to date.

The new Schwab Target Index Funds, a passively managed TDF suite built with underlying exchange-traded funds, cost eight basis points and don't have asset minimums, meaning defined-contribution plans of any size can invest in them.

Schwab, one of the fastest-growing ETF providers, is also offering a retail share class for individual investors with a price tag of 13 basis points.

“Fees are a focal point for some target-date managers in terms of being competitive,” said Jeff Holt, a multi-asset analyst at Morningstar Inc.

The stakes are high for asset managers. Cerulli Associates, a research firm, projects TDFs will capture 90% of new contributions to 401(k) plans by the end of the decade, as participants are automatically enrolled into the multi-asset funds at ever-higher rates and embrace a hands-off approach to retirement investing.

Vanguard and Fidelity, the No. 1 and 2 target-date mutual fund providers, respectively, held the lowest-cost title prior to the launch of Schwab's new series — the Fidelity Freedom Index and Vanguard Institutional Target Retirement funds, both passively managed series, cost 10 basis points, according to Morningstar.

Beyond Vanguard and Fidelity, firms such as BlackRock Inc., State Street Global Advisors and TIAA have also been among the lowest-cost providers of target-date mutual funds on the market, according to Mr. Holt.

“The lowest keeps changing,” Mr. Holt said, describing the low-cost war as an ongoing game of “leap frog.”

The Target Index Funds adds to three other target-date series Schwab has on the market: a passively managed collective investment trust series and an active-passive blend in both mutual funds and CITs.


The new mutual funds, at eight basis points, tie the price of its passive CITs, the Schwab Indexed Retirement Trust Funds. They beat its existing mutual fund series, the Schwab Target Funds, in price by at least 40 basis points. (The Target Funds range in cost from 48 to 82 basis points, the cheapest being the most bond-heavy and most expensive the most equity-oriented.)

“There is a laser focus on fees,” said Jake Gilliam, senior multi-asset class portfolio strategist at Charles Schwab Investment Management.

According to a report from the consulting firm Callan Associates, fees rank second only to portfolio construction in terms of the most important criteria for selecting or retaining TDFs.

Department of Labor fee-disclosure regulation issued in 2012, as well as a 2013 list published by the DOL that gives plan fiduciaries tips for TDF selection, which includes a review of fees and investment expenses, contribute to that laser focus, Mr. Gilliam said.

Further, litigation activity targeting plan sponsors for alleged excessive fees in their 401(k) plans has been particularly high over the last several months.

However, as Susan Shoemaker, partner at Plante Moran Financial Advisors, points out, selecting a TDF requires a much different due-diligence process from assessing an intermediate-term bond fund, for example, because of huge dispersion in the types of TDF.

Differences in glide path, stock-bond mix, and allocation to different underlying style categories (high-yield bonds or alternative asset classes, for example) make the funds unique.

While cost is important, advisers must weigh philosophical differences among plan-sponsor clients as well, perhaps selecting funds with a conservative glide path if downside risk at retirement is a big concern, for example, according to Ms. Shoemaker.

“I don't care if something is two basis points,” she said. “If something is way too aggressive or too conservative for the demographic, I won't use it.”


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