In a move sure to drive the trend toward lower-cost 401(k) plans, The Charles Schwab Corp. plans to 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 BlackRock Inc., Columbia Investment Advisors LLC, the Dreyfus Corp., the Principal Financial Group, TIAA-CREF and The Vanguard Group Inc.
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 exchange-traded funds.
“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 this quarter.
Like Schwab's existing bundled 401(k) packages, Index Advantage isn't available to the independent registered investment advisers that hold assets in custody at Schwab.
Employers that use 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 said.
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 from its share of a 45-basis-point fee from an advisory service into which participants will be defaulted, as well as from 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.
He uses some ETFs in 401(k)s but prefers active managers.
Mr. Peterson declined to comment on Mr. Vaughan's remarks 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 get professional advice despite evidence that advice boosts savings rates, Schwab said in a statement.
The company also is developing a version of Index Advantage that will use only ETFs.
djamieson@investmentnews.com
