(updated with correction)
Schwab Retirement Plan Services is now offering an index-fund-only 401(k) alternative to clients, to reduce costs and to simplify retirement investing for participants.
“We were looking for what would make a difference,” James McCool, executive vice president for institutional services, said in an interview. “Either we continue the status quo or we look for alternatives.”
Currently, about 80% of the $90 billion in assets in Schwab’s 401(k) business are in actively managed funds, said Mike Peterson, a Schwab spokesman. Among the funds in Schwab’s 401(k) lineup, 20% are proprietary and 80% are from other fund managers, Mr. Peterson added.
Schwab’s new 401(k) strategy is called Schwab Index Advantage, which has three main features: index funds from Schwab and other fund families; investment advice for participants from independent advisory firm GuidedChoice Asset Management; and an interest-bearing savings option through Charles Schwab Bank. The Schwab Index Advantage doesn’t include target-date funds.
Although Schwab believes the index-only strategy “represents the future of the 401(k),” Mr. Peterson said his company “will continue to support our traditional 401(k) model for existing Schwab clients who prefer that approach.”
When an existing client or new client converts its plan to Schwab Index Advantage, the plan “will be liquidated and assets in each participant’s account will be allocated as determined by the managed advice service based on individual participant information and the index fund investment menu selected by the plan sponsor,” Mr. Peterson explained.
“Participants will also have the opportunity to select their own asset allocation if they do not desire the managed account service,” he added.
The shift to an all-index fund approach affects a bundled-retirement business that has 1,300 plans and 1.5 million participants. Although Schwab offers 401(k) services to all-sized plans, its biggest market is in the $20 million to $250 million asset range.
Mr. McCool said the two key ingredients to his company’s strategy are reducing fees and providing independent advice. “The 401(k) today is so complicated,” he said. “We want to reduce the clutter and expense.”
Employers, he added, are asking for simplicity. “Employers and consultants tell us that the cost of having an expansive menu (of options) — many of them actively managed — is going up,” he said.
Mr. McCool said his company plans a second phase of index-only investments for 401(k) plans in 2013 by offering index-based ETFs.