Cost-effective exchange-traded funds, relatively unknown in the 401(k) market, are now a reality for the 1.3 million retirement plan participants of Charles Schwabs Schwab Retirement Plan Services, Inc.
Boasting low cost and flexibility, ETFs have been a known investment diversifier for individuals and institutional investors because of their ability to hold various market exposures and intra-day trades. Now, as the national 401(k) service provider begins its offering to the defined contribution market, Charles Schwab says its new ETF platform can benefit both plan sponsors and employees with low fees and more diversification.
There really hasnt been a service like we have where you have a platform, says Steve Anderson, head of Schwab Retirement Plan Services, Inc. Any of the other players tend to be in a fairly small market; they are treating exchange-traded funds like theyre mutual funds, trading them at end of day, or their unitizing them, putting a wrap fee around them to unify them to create fractional shares.
He adds that this is the first platform to trade ETFs as theyre intended where the record keeper, the business trust and the broker-dealer [are all] in a commission-free environment.
The new ETF platform builds out the financial services firms Schwab Index Advantage, which offered index mutual funds to 401(k) plan participants. With the new offering, Anderson says that third-party advisory services provided by Morningstar Associates and GuidedChoice Asset Management will continue to be offered.
At the end of 2013, assets in ETFs rose by $337.5 billion to $1.6 trillion over the annual period, according to figures offered by the Investment Company Institute, a national association of U.S. investment companies, representing a large increase from more than a decade earlier, when ETFs held just $66 billion of the market.
Anderson explains that this increase is not a fluke and will prove to benefit the 401(k) industry, which has been notoriously dominated by active mutual funds.
[Plan participants] are getting a combination of low-cost and professional guidance at the participant level and thats the real driver, Anderson says. Youre going to benefit from having a lower cost, youre going to benefit by having greater transparency in terms of the underlying holdings in exchange-traded funds, and youre going to have the timeliness of the trade.
Schwab Retirement Plans Services will provide roughly 80 low-cost index ETFs, which will encompass 25 asset categories from providers such as Charles Schwab Investment Management, Invesco PowerShares, iShares ETFs, PIMCO, Vanguard and State Street Global Advisors.
It is likely that plan sponsors will pick 15-20 underlying funds to make up their core menu, Anderson says. Then advice from Morningstar and GuidedChoice will analyze these ETFs and exposures and build a portfolio for the participants. However, some participants will also take up the management themselves, he explains.
Misinterpreting the data
Currently, with more than $3.5 trillion in 401(k) plan assets, 41% of plan participants are invested in target-date funds, according to data from ICI and the Employee Benefit Research Institute. These mutual fund products automatically mix stocks, bonds and cash based on a selected time frame.
Anderson explains the employers and benefit plan sponsors are missing out on tangible benefits because employee payroll data, which is rich with employee information, is being misinterpreted by service providers.
The industry has pushed so hard to place target-date funds in the line ups, and particularly as a default feature, Anderson says. Usually thats a simple one-size fits all advice, but its usually driving assets into proprietary funds, almost like a Trojan horse for asset managers.
He adds that plan sponsors should be challenged with the merits of using all the data that we have. Anderson says this is what Charles Schwab is trying to do with the combination of its ETF and advice offering.
