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Retirement Planning > Retirement Investing

Buying Access to the Big Plans

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Transparency, a commitment toward service, and a range of low-fee investment options offered on an open architecture platform.

This is the cornerstone of the Schwab model for affordable and realistic retirement finance, says Jim McCool, executive VP of Schwab’s corporate and retirement services division. It is also the philosophy behind the success of Austin, Texas-based The 401(k) Company, McCool says, and the main reason why Schwab acquired the firm from Nationwide Financial at the tail-end of 2006.

Founded in 1983, The 401(k) Company offers defined contribution plan administration to more than 100 companies, serving 400,000 retirement plan participants around the country. The acquisition gives Schwab access to the mega-retirement plan market: Corporate plans of $250 million at a minimum, which represent a whopping $1.3 trillion in total assets in the U.S.

While this equates to only a handful of companies (1,300 to be exact, McCool says), it is nonetheless an area that Schwab has not entered as yet, he says. Yet it is an extremely important segment of the market, one that is projected to grow to $1.9 trillion by 2012.

Because of its high-end character, the sector has mainly been serviced by consulting firms and a select few mutual fund companies, which have catered to the plans in an almost exclusive manner. However, says Jerry Bramlett, president and CEO of The 401(k) Company, things are changing rapidly and many corporates in the mega space have been asking for lower-cost alternatives and greater investment choices for their retirement plans than what they have had access to until now. The 401(k) Company has been very successful in winning against traditional providers in the mega plan segment, Bramlett says, and the Schwab buyout was the right fit for the firm because “we wanted to be part of a financial institution that not only offered low-cost investment choices on a truly open architecture platform, but is also built around service and transparency.”

Even in the more high-end corporate space, the trend indicates that the low-cost nature and range of investments available in the discount brokerage world is more compelling than anything offered by a consulting firm or a proprietary mutual fund, Bramlett says. More and more, he says, the mega plan world will be looking toward companies like Schwab in an attempt to replace their high-cost retirement plans with low-cost investment alternatives and greater transparency.

For Schwab, The 401(k) Company complements the company’s retirement business strategy and increases its ability to meet the needs of retirement plans of all sizes–in particular the mega ones, McCool says. In this sector of the market, too, the 401(k) plan has become more and more important, not just for advisors and plan sponsors, but at the grassroots, individual level as well, and these clients have the same demands and needs as in any other market segment. As the defined benefit plan has become obsolete, it has become clear that individuals need to be involved in their retirement plans and be given the education and the tools to make the right decisions.

“Sponsors today are asking us more and more about what we have to offer in terms of products and services because they know how much their clients depend upon 401(k) plans,” McCool says. “But while they might say that the burden of retirement is upon an employee, I think it is very important to give them the right set of tools, and a firm like Schwab can help provide those tools that are needed to service the mega market.”

Savita Iyer is a freelance business journalist who is currently based in Mysore, India. She can be reached at [email protected].


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