Last year, Charles Schwab began offering an index-fund-only 401(k) option for companies seeking a lower-cost retirement savings option for employees. Ron Lieber, the Your Money columnist, has written about the benefits of retirement plans that offer more index fund choices because the funds have lower investment management costs than actively managed funds. That generally means the employee keeps more retirement savings.
Now that about 50 employers with about 36,000 workers have committed to switching to the new option, and about 20 of the plans are fully up and running, Schwab says the savings on investment costs are in line with what it expected. The index-only option has average investment expenses of just under $15 per $10,000 invested, compared with more than $65 per $10,000 for previous plans that were also provided by Schwab but included actively managed funds.
That means more of the returns on the funds should accrue to employees. Cutting the fees can mean an additional $115,000 over 30 years, depending on the specific assumptions used about the amount saved, employer matching and investment returns, Schwab says.
That does not necessarily mean, however, that all participants in Schwab Index Advantage plans are realizing a 77 percent reduction in average fees, over all. When a company switches to an new index-only plan, its participants are automatically enrolled in a program that offers them individual savings and investment advice from an outside firm called GuidedChoice. The annual fee for the service is about $45 per $10,000, according to Schwab, and is based on the employee’s account balance. That brings the total fees — for investment management, as well as the advice — to just under $60 per $10,000.
That’s a much less significant drop, about 8 percent. But Schwab notes that employees are now getting access to investment advice tailored to each person’s age, income, account balance and savings rate. In addition, employees can opt out of the advice option — and opt back in, if they change their minds — by going online or calling Schwab. So far, though, most have not. Schwab says 87 percent of employees in the plans are using the advice option.
That’s an important part of the offering, said Steve Anderson, executive vice president for Schwab Retirement Plan Services, because employees who receive individual advice generally save more and are more committed to their goals over the long term. Rather than having the fees go to mutual fund companies, he said, the employees are “paying for the personalized support at the individual level.” (The index-only option is offered to employers with retirement plan assets of $20 million or more.)
Schwab is planning to introduce a 401(k) later this year that offers only exchange-traded funds — nonmanaged mutual funds, pegged to a given index, that trade throughout the day like stocks. Mr. Anderson said Schwab expected investment fees to be even lower on such funds — on the order of $10 per $10,000 invested.
What do you think of the Schwab index-only option? Do you think the individual advice is worth it, or would you opt out?
Article source: http://bucks.blogs.nytimes.com/2013/02/26/schwab-promotes-lower-cost-of-its-index-only-401k/?partner=rss&emc=rss
