Brokerage giant Charles Schwab (NYSE: SCHW) said Wednesday it will bring the advantages of exchange traded funds to 401(k) retirement plans.
Schwab Retirement Plan Services, a unit of California-based Schwab, has launched a full-service 401(k) program based on low-cost exchange-traded funds, according to a statement issued by the firm. Schwab’s 401(k) ETF effort comes after the 2012 launch of Schwab Index Advantage, which provides workers with low-cost index mutual funds and personalized advice.
A 401(k) plan using index exchange-traded funds can reduce investment expenses by more than 90 percent compared to a typical 401(k) plan that primarily uses actively managed mutual funds, and by more than 30 percent compared to a 401(k) plan that uses index mutual funds, said Steve Anderson, head of Schwab Retirement Plan Services, in the statement.
Schwab Retirement Plans Services is making 80 ETFs from 11 providers available in its new 401(k) ETF platform. In addition to Schwab ETFs, plan participants can choose from ETFs offered by ETF Securities, First Trust, Guggenheim Investments, Invesco PowerShares, iShares ETFs, PIMCO, State Street Global Advisors, Van Eck Global, Vanguard and United States Commodity Funds.
Schwab has pre-existing relationships with ETF Securities, Guggenheim, PowerShares, State Street and U.S. Commodity Funds, all of which offer ETFs on a commission-free basis through the Schwab OneSource trading platform. [Schwab Expands Commission-Free ETF Offerings]
“Using a patent-pending process, Schwab Index Advantage is the first 401(k) program that fully integrates exchange-traded funds as core investments within the plan, including commission-free intraday investing along with the ability to process partial share interests,” Anderson said.
“We believe a truly effective offering requires the ability to invest in and receive allocations of both full and partial shares of exchange-traded funds when the market is open, and that’s what we’ve built. Other 401(k) offerings that we’ve seen take a less comprehensive approach to including exchange-traded funds and also tend to serve smaller plans,” he added.
Schwab’s foray into providing ETF access in 401(k) plans puts the firm in competition with a familiar rival. TD Ameritrade (NasdaqGM: AMTD) is already offering ETFs to the 401(k) world and has been doing so for nearly three years. [Ameritrade Solves 401(k) ETF Riddle]
Brokerage firms looking to offer ETFs in 401(k) plans have previously faced some stumbling blocks, including technological challenges, such as the fact that most 401(k) platforms were designed to trade only at the end of the day, a la mutual funds.
Other issues include the oft-discussed topic of fractional shares, a concern because ETFs – unlike mutual funds — generally can only be bought and sold in whole shares.
“Despite the obvious benefits of exchange-traded funds, mutual fund companies that dominate the 401(k) industry have largely ignored them – simply because these companies lack either the capabilities or the will to effectively accommodate exchange-traded funds in the retirement plans they offer. Others in the industry suggest that offering exchange-traded funds to 401(k) participants will lead to over-active trading, an argument not supported by the facts.We heard the same false argument 25 years ago when the industry began updating participant 401(k) balances on a daily basis, instead of quarterly,” Anderson noted. “We believe in challenging the status quo and investing our resources to help drive positive change and contribute to better outcomes for hard-working Americans.”
Then there is the notion that many U.S. works have access to index mutual funds in their 401(k) plans, some with fees below 0.1% per year, so there is not a need to offer low-cost ETFs to workers.
Obviously, that argument is flawed because “many” does not mean a majority and it certainly does not mean “all.” As an editorial aside, I will point out that I’ve helped my wife select funds for her 401(k) at two different jobs in the time we have known each other. The plans she has been subjected to did not have 80 funds to pick from, but they had plenty of mutual funds with fees in excess of 90 basis points per year. I’m pretty sure she would have enjoyed increased choice with lower fees. Who wouldn’t?