Charting New 401(k) Channels

The platform, part of Schwab Index Advantage, currently offers 27 asset categories in roughly 80 low-cost ETFs. “We are not using any leveraged or exotic ETFs,” he says. “It’s pretty vanilla in terms of how we’ve approached this based on the fiduciary role of the plan sponsor.”

The average operating expense ratio for the new platform is less than 10 basis points, versus 15 basis points for the index mutual fund version of Schwab Index Advantage, launched last year. Combining fund investment costs and professional management fees, workers will pay on average less than $60 per $10,000 invested with Schwab Index Advantage, says Anderson, versus $95 to $140 per $10,000 for similar professional management in a typical 401(k) plan using primarily actively managed mutual funds. “With that lower asset management fee,” he says, “it really opens the opportunity for professional advice.”

Field Observations
Ascensus, a leading provider of record-keeping and administrative services that works with approximately 44,000 defined contribution plans, mostly small or midsize plans, is seeing a big shift toward the “help-me-do-it investments,” says Mike Narkoff, SVP of sales at Ascensus. “It’s easier for average plan participants to connect the dots,” he says, noting that interest is largely being directed at target-date funds and risk-based funds.

Ascensus has also observed a broader range of institutional share class offerings. “As we add new relationships with existing asset managers,” says Narkoff, “the majority has been in the low-cost institutional bucket.”

What Ascensus is not seeing much of in the size plans it works with is custom target-date funds. “I don’t see it coming down market as fast as other things,” he says. Nor has there been much adoption of alternative investments.

Stone Street Equity LLC, a Pearl River, N.Y.-based firm managing $3 billion in retirement assets for approximately 60 plan sponsors, has been eager to try new 401(k) products. Through its affiliation with LPL Financial, it is piloting a program with BlackRock, the world’s largest asset manager, that enables it to take 3(38) responsibility and customize target-date funds for 401(k) plans, says Barbara Delaney, a principal with Stone Street.

Stone Street has been using the Goldman Sachs Strategic Income Fund (GSZIX) for about a year. “Our goal is to protect principal,” she says. “The fund can go anywhere it sees opportunity.” She thinks multi-sector bond funds can be particularly useful for plan participants.

“Fixed income is probably the most misunderstood asset class for them,” she says, noting that they don’t understand that bonds have the potential to lose money, don’t realize there are different types of bonds and don’t know how to move between fixed-income funds.

Anton Bayer, founder of Up Capital Management, a San Jose, Calif.-based firm that manages approximately $80 million in assets for 401(k) plans plus $85 million in assets for its wealth management clients, plans to look at the costs and features of the Schwab all-ETF platform. Costs have become increasingly critical as the firm has moved away from a commission-based model. It now serves as an RIA for most of its 401(k) clients.

Up Capital helps select funds and perform full cost analyses for plan sponsors, who typically hold 18 to 25 funds. Still, “Just going after expenses isn’t the answer,” Bayer says. “Our goal is to constantly deliver to employees the best fund lineup.”