Schwab Retirement Plan Services on Wednesday announced the launch of an all-exchange-traded-fund 401(k) designed to combine the strategies of lower-cost ETFs with the use of managed accounts.
“We want employees to take advantage of lower fees and professional advice,” said Steven Anderson, executive vice president of Schwab Retirement Plan Services, in an interview.
The all-ETF strategy is a version of the all-index mutual fund 401(k) that Schwab unveiled in 2012 called Schwab Index Advantage, and Mr. Anderson said the ETF approach could further reduce fees.
Schwab Retirement Plan Services isn’t the first provider of an ETF-based 401(k), but the handful of other providers cater to very small plans. Larger 401(k) plans are reluctant to use ETFs due to concerns about administration and administrative costs as well as reconciling intraday trading of ETFs vs. the end-of-trading accounting for mutual funds. Other concerns by plan executives focus on the fact that mutual funds allow the purchase of fractional shares, but ETFs do not. (Pensions & Investments, June 10, 2013)
However, Mr. Anderson said Schwab has developed a system that enables no-commission intraday trading “with the ability to process” partial shares.
The 401(k) plans for which Schwab is a record keeper range in asset size from $20 million to $1 billion, Mr. Anderson said. The target market for its all-ETF 401(k) relates more to “a philosophical approach” by sponsors rather than to plan size, he said. That means plans must be willing to offer only ETFs rather than mixing and matching with other investments options such as actively managed funds, index mutual funds or target-date funds.
“This is very deliberate and specific,” Mr. Anderson said.
These plans must offer managed accounts by Morningstar or GuidedChoice Asset Management. Participants who prefer managing their accounts by themselves can rely on the ETFs or a self-directed brokerage account if the plan provides this option.
Plans that switch to the all-ETF format would have to re-enroll employees from existing 401(k) strategies to the all-ETF approach, and Schwab must be the record keeper. Schwab’s all-ETF 401(k) has lined up 11 ETF providers to offer 78 ETFs in 27 asset categories, Mr. Anderson said.