In a move sure to drive the trend toward lower-cost 401(k) plans, The
Charles Schwab Corp. will introduce a bundled 401(k) product that offers low-cost index funds.
Called Index Advantage, the plan will offer 40 funds covering about 16 asset classes, said Mike Peterson, a Schwab spokesman. The product also will have a bank deposit savings option.
The mutual fund lineup will include products from Schwab as well as Vanguard, Dreyfus, Blackrock, TIAA-CREF, Principal and Columbia.
The movement toward lower fees is being helped along by pending rules from the Labor Department that will boost fee transparency.
“Schwab is appropriately reacting to the market,” said Greg Vigrass, president of Folio Institutional, which offers 401(k)s with ETFs.
“Investors are becoming more and more cost conscious, and anything that lowers costs to small companies is a good thing,” said Peter Philipp, an adviser with Cambridge Investment Research Inc. who manages about $100 million in 401(k) assets.
Schwab expects to land its first client for the new plan later this quarter.
As are Schwab's existing bundled 401(k) packages, Index Advantage is not available to the independent RIAs who hold assets in custody at Schwab.
Employers using Index Advantage also will have the option of providing employee participants with a self-directed brokerage account.
Schwab's new offering is likely to compete well against legacy plans that have limited index options.
“A lot of older plans [have] one index option, and that is it,” said Jeff Elvander, chief investment officer at the Retirement Plan Advisory Group, a consulting firm whose 400 members handle 22,000 company plans with $90 billion under administration.
“For our client base [of advisers], we have recommended a three-pack” of index funds covering U.S. equities, international equities and fixed income, he said.
“That's where index funds have the most value — gaining broad market exposure,” Mr. Elvander added.
Many plan employers have chosen higher-cost active funds that pay trail fees to administrators, thereby eliminating that cost for the company, observers said.
Schwab will earn money off its share of a 45 basis point fee from an advisory service that participants will be defaulted into, as well as assets gained in its own index funds, Mr. Peterson said.
Not everyone is a fan of using index funds in 401(k)s.
Schwab's index-only plan is a “marketing gimmick,” said R. Allen Vaughan, founder of The 401k Advisory Group Inc., which manages about $27 million in 401(k) assets.
“The weakest link [in a plan] really is at the plan [adviser] level,” Mr. Vaughan said. “The big thing that makes a plan work is engagement by employees.”
Mr. Vaughan uses some ETFs in 401(k)s, but prefers active managers.
Mr. Peterson wouldn't directly comment on Mr. Vaughan's reaction, but said the “low cost of the index funds, together with the professional managed service and the bank saving option makes this a unique offering.”
Index Advantage will offer the advice option through GuidedChoice Asset Management Inc., a third-party provider of investment advice and planning tools to retirement plan participants.
Only about one in 10 employees takes advantage of professional advice today despite evidence that advice helps to boost savings rates, Schwab said in a statement.
The company also is developing a version of Index Advantage that will use only exchange-traded funds. The ETF-only platform will be available sometime next year and is expected to have even lower costs, Mr. Peterson said.
The Index Advantage offering comes from Schwab Retirement Plan Services, Inc., a 401(k) provider to about 1.5 million workers with about $90 billion under administration.
