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Schwab Offering Index-Fund 401(k) Plan Lineup to Lower Fees

People walks past a Charles Schwab Corp. brokerage in New York. Photographer: Daniel Acker/Bloomberg
People walks past a Charles Schwab Corp. brokerage in New York. Photographer: Daniel Acker/Bloomberg

Jan. 10 (Bloomberg) -- Charles Schwab Corp., looking to tap into the increasing popularity of passively managed funds, is offering sponsors of 401(k) retirement plans a package of low-cost mutual funds that track a market index.

“We see it as an excellent opportunity to expand our business,” said Steve Anderson, senior vice president of retirement plan services. San Francisco-based Schwab serves about 1.5 million participants totaling about $90 billion in assets, he said. Fidelity Investments, based in Boston, is the largest 401(k) provider with almost 11.7 million savers.

The Schwab offering uses index funds only combined with investment advice to lower costs and increase savings as regulators, plan sponsors and investors focus more on fees. Employers who choose Schwab Index Advantage for their plans can let workers choose from a lineup of so-called passively managed index mutual funds from several companies such as Schwab, Vanguard Group Inc. and BlackRock Inc., said Anderson.

Americans held about $2.9 trillion in 401(k) accounts as of Sept. 30, according to the Investment Company Institute. Workers pay an average of 91 percent of the costs associated with 401(k)-type plans, according to a November report by Deloitte LLP for ICI, the Washington-based trade group for the mutual-fund industry. The median fee was 0.78 percent of assets, or about $248 per participant, the 2011 study said.

The Schwab index-fund portfolio will have an operating expense ratio of about 20 basis points to 25 basis points, said Anderson. A basis point is 0.01 percentage point. The offering will be packaged with an advisory service including annual rebalancing and individual consultations that will cost another 45 basis points or less, he said.

Guided Choice

The package from Schwab also includes an interest-bearing savings option insured up to $250,000 by the Federal Deposit Insurance Corp. through Schwab Bank.

GuidedChoice, a San Diego-based independent advisory firm, will provide the advice and asset allocation services, Anderson said.

About 32 percent of employers that sponsor 401(k) plans replaced a fund or manager last year because of performance, according to a study released yesterday by Callan Associates. About 45 percent of plan sponsors increased their use of passive funds in 2011, while 7 percent increased use of active funds, the study said. Net flows into all passively managed U.S. funds increased 57 percent to about $69 billion in 2010 from about $44 billion in 2008, according to Morningstar Inc.

The increase likely is tied to the attention on high fees, which index funds can help manage, said Lori Lucas, defined contribution practice leader for San Francisco-based Callan.

Labor Rules

U.S. Department of Labor rules requiring detailed disclosure of 401(k) expenses are scheduled to take effect this year, making it easier for companies and their employees to see what they’re being charged. The rules may spur small employers and their workers, who generally pay higher fees for their plans than larger companies, to shop for better deals, and put pressure on providers such as mutual-fund firms and insurers to cut costs.

Schwab also is developing a 401(k) offering comprised exclusively of index-based exchanged-traded funds, which may be available by the middle of next year, Anderson said. Shares of exchange-traded funds, known as ETFs, generally track an index and trade on an exchange like a stock.

“We really feel three, four, five years from now ETFs are going to be a much bigger player in the 401(k) space,” said Anderson. “We feel we are well positioned to introduce that to the market.”

To contact the reporter on this story: Margaret Collins in New York at

To contact the editor responsible for this story: Rick Levinson at

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