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Schwab launches low-cost index-based 401(k) plan
January 10, 2012 / 7:51 PM / 6 years ago

Schwab launches low-cost index-based 401(k) plan

A man walks past a Charles Schwab Investment branch in Washington January 19, 2010. REUTERS/Jim Young

(Reuters) - Charles Schwab Corp launched a new 401(k) plan on Tuesday comprised exclusively of index mutual funds that it says significantly reduces the costs of saving for retirement by taking active management out of the equation.

The launch comes just months before new U.S. Department of Labor rules are due to take effect requiring 401(k) plan providers to disclose the fees they charge. [nN1E803045]

“We saw how people got upset about even the fees on their bank credit cards and debit cards,” said Jim McCool, head of Schwab’s Institutional Services. “Wait until they see their 401(k) statement disclosures.”

There are about 50 million Americans with 401(k) accounts totaling nearly $3 trillion in assets, according to data from Schwab. Some of Schwab’s current 401(k) customers are already transitioning to the new model, the company said.

Schwab is one of the biggest U.S. brokerages, with about $1.67 trillion in client assets.

McCool said that participants in typical company 401(k) plans pay about 1 percent in fees and an additional half percent for financial advice. That would add up to $1,500 in fees for a person with $100,000 in their 401(k).

A Cerulli analysis of mid-sized 401(k) plans pegged average costs -- without advice -- a bit lower, at about 86 basis points.

Schwab’s “Index Advantage” 401(k) plan will cost participants 65 to 70 basis points, with financial advice included, or $650 to $700 in fees on a $100,000 account.

Without the advice, the cost to participants is about 20 basis points.

“What we’re doing is helping both employers and participants in these 401(k) programs understand the real impact of expense,” said McCool.


Employers who opt for Schwab’s indexed-fund plan can choose from about 17 asset categories to build their plans.

Around half of the funds will be from Vanguard, with the remainder from Schwab, BlackRock, TIAA CREF and others, said Steve Anderson, head of retirement plan services at Schwab.

Employees will be able to opt out of the financial advice component of the plan, but Schwab expects about nine of 10 to take on the services, provided by GuidedChoice Asset Management. In typical plans, only about 10 percent of participants opt for advice services, he said.

“Nine of 10 are flying blind,” McCool said.

Schwab also plans to introduce a version of Schwab Index Advantage that will use only index-based exchange-traded funds, probably in early 2013, McCool said.

Reporting by John McCrank in New York; Editing by Jennifer Merritt and Chelsea Emery

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