401(k) Plans: What’s In Store for the Future?
So far this week, Jim McCool has talked about the past and present state of 401(k) retirement plans. In this final installment of his Q&A, he focuses on the future.
Q. How is Schwab addressing the challenges American workers face with respect to retirement savings?
McCool: To help people save more money for retirement, Schwab is introducing a new 401(k) offer designed to lower costs and simplify investing through personalized saving and investment advice. This is our next evolution 401(k) offer – Schwab Index Advantage™ – which will include an index mutual-fund-only investment lineup. As I indicated in the last post, the potential advantage to index funds is that they are generally less expensive to manage. Many workers don’t even realize they are paying fund operating expenses on their 401(k) investments – however, they can pay close to one percent per year, and sometimes more, depending on the types of investments available in their 401(k) plan. These expenses can make a big difference over someone’s career. As I said before, in our analysis, an index-only approach could add nearly $115,000 to the retirement savings for an average worker, just by lowering the investment expenses in their 401(k) plan.1
By selecting Schwab Index Advantage, employers will also be choosing to automatically enroll their employees into a low-cost, independent, personalized retirement investment and saving service.2 This means every employee will receive a strategy that allocates their account balances among the plan’s investments, unless they choose to create an allocation on their own. Even if an employee never seeks out additional guidance, this service will take into account a number of important factors like the worker’s age, salary, savings rate within the plan, and account balance in determining their asset allocation strategy. Today, a lot of plans enroll employees into target date funds automatically, but that approach only considers an employee’s age – and it’s a one-size-fits-all approach that doesn’t take into account other data that could influence an individual’s savings plan. While target date funds can be a good start, they typically don’t take into consideration much of the important information that will be used by the independent advice provider to allocate investments in employees’ 401(k) accounts.
We are also developing a second version of Schwab Index Advantage that is intended to be the first fully-scaled exchange-traded-fund-only (ETF) 401(k) program in the industry. We expect that the low investment costs of index ETFs will help to reduce fund investment expenses for workers even further, and they are a natural alternative for the next evolution 401(k) offer Schwab is developing. Independent, personalized advice will also be an integral part of this alternative. We’re confident Schwab Index Advantage can deliver what really matters – help for workers as they strive to save more for retirement.
How knowledgeable do you feel about your own 401(k) plan? What’s great about it? What’s not?
Would you like more help with savings and investing decisions in your 401(k) plan?
Do you understand how much you pay today for your 401(k) plan?
What do you think about Schwab’s next evolution of the 401(k)?
Send us a comment or question on the topic and Jim will provide a response.
1 Hypothetical assumptions for illustrative purposes only supporting an additional ~$115,000 to a 401(k) participant’s retirement savings: Annual market growth, 7.50%; initial contribution rate (year 1), 5.00%; increase in contribution rate (each year for years 2-6), 1.00%; ongoing contribution rate (each year for years 6-30), 10.00%; employer match, $.50 per $1 for the first 6% of income contributed; beginning salary, $50,000; yearly salary increase, 3.0%; starting age, 25; age at first year of distributions, 55; percent of last salary distributed annually, 50.0%. Approximate difference of $115,000 represents the additional account balance resulting from an investment allocation comprised of index mutual funds with a total weighted average operating expense ratio (OER) of 20 basis points versus an investment allocation comprised of actively managed mutual funds with a higher total weighted average OER of 86 basis points. The 86 basis point assumption is based on Cerulli analysis of mid-sized 401(k) plans. Assumptions do not factor in the potential impact of professional, independent advice services, nor any fees that may be associated with these services or other fees that may be charged to a participant account. Results not guaranteed.
2 The retirement investment and savings planning service provides participants with a retirement savings and investment strategy, a major component of which is a discretionary investment management service furnished by GuidedChoice Asset Management, Inc. (“GuidedChoice®”), an independent investment advisor. GuidedChoice creates discretionary managed portfolios based on Modern Portfolio Theory using investment alternatives available in the plan. GuidedChoice is not affiliated with or an agent of Schwab Retirement Plan Services, Inc. ("SRPS"), Charles Schwab & Co., Inc. ("CS&Co."), or their affiliates. Neither CS&Co., SRPS, nor their affiliates supervise, make recommendations with respect to, or take responsibility for monitoring the services provided to participants by GuidedChoice. Schwab Advice Consultants, who are employees of CS&Co. and not of GuidedChoice, facilitate participant access to the GuidedChoice services, but do not provide investment advice or recommendations regarding the GuidedChoice services or generally as part of the advice service. Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market. There is no guarantee a savings and investment strategy will provide adequate income at or through retirement. Fees are charged for the advice service, including its discretionary investment management service, based on the participant’s account balance. Participants should carefully consider information contained in the materials furnished at their employer's direction regarding the services provided by Schwab and GuidedChoice including information regarding compensation, affiliations and potential conflicts.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-724-7526. Please read the prospectus carefully before investing.
Remember that cost is only one consideration when making an investment decision. Investment returns and principal value of index mutual funds will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Index mutual funds are not without risk and an investor may give up the opportunity to outperform the market by not being in an actively managed fund. All index mutual funds are subject to management fees and expenses.
401(k) Plans: The Current State
401(k) Plans: Where We’ve Come From
Schwab to Independent RIAs: Manage a Profitable, Scalable Business