Is it a race to the bottom or smart use of scale?
In what’s sure to shake-up the money management price wars, Schwab announced early Thursday that its Target Index Funds will be made available to retirement plans of all sizes at 8 basis points with no minimums, and to individual investors at 13 basis points with $100 minimum.
Schwab Target Index Funds are index funds constructed with Schwab ETFs as the underlying investments. The company says the ETFs have the lowest operating expenses in their respective Lipper category, which allows it to offer the new funds at such low prices.
“We have $15 billion in target date funds and $50 billion in exchange traded funds, which makes us a top-five provider,” said Jake Gilliam, senior multi-asset class portfolio strategist for Schwab Target Funds. “We are able to package the Target Index Funds in a way that is well within our ability to bring this to market.”
Retirement plan participants appear to increasingly understand the impact of cost. New data from Schwab finds fees are top of mind when workers choose to invest in their plan’s TDFs, second in importance only to the fund’s 5-year performance record.
In addition to price, Gilliam also pointed to the firm’s glide path as a competitive differentiator.
“Young participants just staring out have an asset mix of approximately 95 percent equity, 5 percent fixed income, which is about 5 percent more aggressive than [comparable products],” he explained. “At retirement, it consists of approximately 40 percent equity, 60 percent fixed income, which is more conservative than the industry average to help them stay invested through market shocks.”
Noting the through, not to, approach the glide path takes, he said each fund then continues to reduce its equity allocation for the next 20 years to reach its final allocation of approximately 25 percent equity, 75 percent fixed income.
“Not only are the overall allocations more aggressive and conservative, but so too are the underlying exposures. For instance, the equity allocation of the retiree will include less exposure to small-cap and international stocks than a younger investor. Similarly, a younger investor’s fixed income allocation might not include TIPS.”
Schwab also said that as of November 1, 2016, it’s collective trust funds (or collective investment trusts) will be made available to plan sponsors for eight basis points, with no minimum investment required, which aligns with the pricing for the new Target Index Funds.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
