ETFs: Coming to a 401(k) Plan Near You

January 13th at 2:30pm by Tom Lydon

Charles Schwab Corp. is developing a 401(k) plan that will use only index-based exchange traded funds. The move could speed the adoption of ETFs in retirement plans, which are dominated by traditional mutual funds.

This week, Schwab Retirement Plan Services rolled out Schwab Index Advantage, a 401(k) product comprised exclusively of index mutual funds with low fees. It will feature index funds managed by Schwab and other asset managers.

Schwab Retirement Plan Services is a 401(k) provider to about 1.5 million employees.

The San Francisco-based company said it is also working on a version of Schwab Index Advantage that will focus on ETFs. [Retirement Investors Focusing More on Fees]

“With Schwab Index Advantage we are developing a new alternative for employers and their employees by focusing on the two things that really matter: low cost and independent advice,” said said Jim McCool, executive vice president and head of Institutional Services at Schwab, in a press release.

“Fund operating expenses for index mutual funds and ETFs are typically lower than those associated with most actively managed mutual funds offered in 401(k) plans today. We believe index funds can provide employees with a better opportunity to accumulate more savings for retirement,” added Steve Anderson, head of retirement plan services at Charles Schwab. “Through such low-cost investments, fund operating expenses could be cut significantly. For the average worker in a 401(k) plan, that can mean nearly $115,000 more at retirement.”

The average actively managed large-cap mutual fund has an annual expense ratio of about 1.3%, whereas the average large-cap index fund trades at around 0.71%, reports David Pitt for the Associated Press. In comparison, an equivalent index ETF costs about 0.33%.

Elsewhere, ING Direct offers index ETFs in its Sharebuilder 401(k) plan, and T.D. Ameritrade also includes ETF options in its 401(k) plan.

Lower expense ratios translates to lower fees and higher returns in 401(k) accounts, which can amount to thousands of dollars over the life of one plan.

“We know that through index funds we can ultimately take a lot of expense — what we call drag — off of the participant’s account,” Schwab’s McCool said in the AP story. “That translates to more money in their account just by trimming the expense factor down.”

For more information on ETFs and retirement plans, visit our 401(k) category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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