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

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Charles Schwab says it is rolling out target-date funds for retirement plans with expenses of under 0.10%, which could give it competitive edge against larger rivals, like Fidelity and Vanguard. Analysts say it’s likely that this will cause other firms to lower their fees.

The funds, called Schwab Target Index Funds, are constructed with ETFs.

The company’s new products “are the lowest in terms of basis points for expenses within the retirement plan industry at .08% and have no investment minimums,” said Jake Gilliam, senior multi-asset class portfolio strategist at Charles Schwab Investment Management, in an interview. “They have not been available with these features to small and large plans until now.”

(The same funds have a 0.13% fee and minimum investments start at $100 for investors outside of retirement plans.)

Schwab uses its lowest-cost ETFs to build the new products, he said. “We are a top-five ETF provider with $50 billion in assets … and have been selling target-date funds since 2002 with $15 billion in assets.”

According to Gilliam, “Schwab has a long history of being disruptive in bringing low-cost products to individual investors for the past 40 years, such as the commission-free ETF trading we launched in 2009, as well as low-cost ETFs and now mutual funds. This continues the tradition of disruptive pricing and brings change to individual investors and retirement plan participants.”

“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.