Charles Schwab Investment Management, a subsidiary of San Francisco-based Charles Schwab, is leveraging its headquarters' low-cost investment brand in a new line of passively managed target-date funds.

The Schwab Target Index Funds series will be offered to 401(k) plans at eight basis points, making the funds the lowest cost target-date series available to plan sponsors, according to Charles Schwab Investment Management.

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And that price point will be available to all sponsors, regardless of size, and will not require a minimum investment by any plan.

Jake Gilliam, senior multi-asset class portfolio strategist at Charles Schwab Investment Management, expects the new series to be a "game changer" in the target-date fund industry.

"There is no lower price TDF available to plan participants in the market," said Gilliam in an interview.

The fact that all plan sponsors will be able to access the series at 8 basis points without a minimum investment requirement will "level the playing field for all plans, big and small," added Gilliam. "We think this series will be very disruptive for the industry and set the tone for TDFs going forward."

The new Target Index Series is built only with Schwab's proprietary exchange-traded funds. Exchange-traded funds have, of course, surged in the retail investment market — the funds now hold approximately $2.5 trillion, and analysts at Pricewaterhouse Coopers expect U.S. assets in target-date funds to hit $6.2 trillion by 2021. But their allure with plan sponsors has lagged considerably.

Charles Schwab began offering its line of exchange-traded funds in 2009. The firm's 21 exchange-traded funds hold more than $50 billion in assets, making Schwab a top five exchange-traded fund provider. Gilliam says Schwab's exchange-traded funds routinely carry the lowest expense ratios among the now thousands of exchanged-traded funds issued globally.

That explains why the new target-date funds are built only with Charles Schwab products, said Gilliam, who also noted that, to his knowledge, no other passively managed target-date funds are built exclusively with exchange-traded funds.

Comparison to the big three

 

The $763 billion target-date fund market is dominated by three players — Vanguard, Fidelity and T. Rowe Price, which together accounted for more than 70 percent of the market in 2015, according to Morningstar.

Schwab issued its first target-date series in 2002. According to Morningstar, the Schwab Target TDF series held 0.42 percent of total target-date fund market share in 2015.

Schwab's new Target Index Funds are less expensive than the target-date fund offerings from Vanguard, Fidelity and T. Rowe Price, and are the cheapest among more than 60 target-date fund series reviewed in Morningstar's 2016 Target-Date Fund Landscape report.

Vanguard's line of target-date funds accounted for nearly 30 percent of the target-date fund market in 2015. An institutional share of its Target Retirement Series was available for 10 basis points in 2015, according to Morningstar's research. Vanguard's website says the institutional share class of all its mutual fund offerings is available to sponsors with a minimum investment of $5 million; institutional select shares are available with an investment between $100 million and $200 million.

Fidelity's TDF series accounted for nearly 24 percent of the market. The firm's Freedom Index TDF series was offered at 14 basis points last year, according to Morningstar.

Schwab's glide path

 

The Target Index Fund series is the fourth target-date offering from Schwab, which already offers all passive and passive/active collective investment trust target-date funds and a passive/active mutual fund line.

The indexed series is designed to manage savings through retirement. Early in the glide path, Gilliam says Schwab will allocate about 95 percent of assets to equities, or roughly 5 percent more than the industry average. At retirement, equities will account for about 40 percent of assets, or 5 percent less than the industry average.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.