December 5, 2023

Bucks: Charles Schwab to Offer Index-Only 401(k) Plans

Ron Lieber’s Your Money column last weekend urged investors to ask their employers for more index-fund choices in their 401(k) retirement plans. Many plans are heavy on actively managed funds, even though index funds offer lower administrative costs and relatively lower risk that benefit investors as they build their nest eggs.

Apparently, financial services firm Charles Schwab thinks that’s a good idea, too. Later this year, Schwab will offer employers a 401(k) package that includes only index funds, says Jim McCool, who runs Schwab’s retirement plan business.

In a phone interview, he said the company would begin marketing the plan this summer, and would have the offering in place for 2012. The package will include access to independent investment advice, which has been shown to help improve individual investor performance, he said. Schwab says it believes it is the first major financial services firm to offer an index-only option.

Next year, he said, Schwab also will begin offering 401(k) plans comprising only exchange-traded funds, another nonmanaged option that is increasingly popular with investors.

Both options, he said, represent an way to reduce overall expenses so more real returns end up in the pockets of plan participants. “We’re trying to clear excess costs out of 401(k)s, so you can have low-cost, highly efficient management through index funds, and independent advice,” he said.

(A quick refresher: Index funds buy shares of all companies in a given universe, such as all stocks in the Standard Poor’s 500 stock index. Exchange-traded funds are also nonmanaged mutual funds pegged to a given index, but they trade throughout the day, like stocks. For an overview of E.T.F.’s, see Tara Siegel Bernard’s discussion here. Actively managed funds try to beat an index, or other benchmark, by choosing stocks with the goal of outperforming the overall market. They usually have higher expenses than nonmanaged funds, which can eat into investors’ returns.)

Mr. McCool said the new offerings grew out of recent research showing that 401(k) plans could do a lot better for most investors: three of every four plan participants are not on track to reach their retirement goals; more participants than ever think their 401(k) is just as complicated as their company’s health care plan; and just one in 10 gets independent investment advice. “I think there’s a serious question as to whether the track of the 401(k) is where it needs to be,” he said.

An index-only platform, he says, will remove unnecessary “drag” on returns caused by mutual fund expenses. Schwab estimates that can put an additional six figures worth of money in some accounts by retirement time, depending on how much people save.

The offerings target employer plans with $20 million to $1 billion in assets, he said.

An important component of the new offerings, Mr. McCool said, will be the availability of advice from an independent investment adviser. Plan participants who use such advice, he said, tend to save more, to better diversify their holdings and to stay fully invested even when markets dip, which improves their long-term returns.

Mr. McCool declined to give specifics of the plans’ advice component, saying details would be announced later. Currently, though, Schwab offers an advice option for companies using its retirement plans through an independent firm called Guided Choice. Participants can talk to an adviser about which funds to invest in, how much to allocate to each fund and the percentage of their income to invest.

What do you think of a 401(k) plan offering only index funds, or only E.T.F.’s? And what has your experience been with investment advice offered through your employer’s retirement plan?

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