Schwab Throws Down Low-Cost Gauntlet on Target-Date Funds

“At 8 basis points, this would be the lowest expense ratio for target-date mutual funds,” said Jeff Holt, associate director of multi-asset strategies at Morningstar. “There are some competing products in the 0.10-0.15% range,” he said, such as Vanguard institutional shares and the Fidelity Freedom Index series.

“The bar of being the lowest-cost provider continues to come down – going lower and lower,” Holt explained. “While Schwab is the lowest-cost provider now, many other target-date providers are competing with it on cost and are sensitive to the competition. We should continue to see downward pressure on fees.”

Fund families can cut fees by incorporating index-based funds, for instance. “But those with target-date funds that employ active strategies are finding ways to cut costs by including some passive strategies within their funds,” the analyst said.

In other words, Schwab should not expect a huge flood of investors to move money into these funds because of pricing. “When you get down to it, the difference of one or two basis points is not going to disrupt the industry significantly,” Holt said.  

Retirement plans have been slow to incorporate ETFs. In 2015, Deutsche Asset Management liquidated five X-trackers target date ETFs, saying the move would “better position the business for future growth.”

At the time, ETF columnist Ron DeLegge blamed retirement plans’ hesitation on fund providers who seem “so distracted with launching cool new ETFs (product development) that product distribution has taken a backseat.” But he acknowledged that ETFs would eventually “nudge their way” into retirement plans. The intensifying fund fee war appears to be the nudge they needed.