Schwab Delays ETF 401(k) Platform Launch

October 07, 2013

The defined contribution retirement market will have to wait longer for Schwab’s ETF platform.

Charles Schwab, the big and influential discount broker, is delaying the much-anticipated rollout of a 401(k) retirement plan that will use ETFs three years after making the initial announcement at an asset management conference in March 2011.

The San Francisco-based company, which earlier this year announced that it planned to launch an ETF retirement plan at the end of 2013, said the launch is being delayed once again, adding new doubts to a series of delays that has led to speculation that the company might be having difficulty surmounting basic technology problems.

“At this point, we’re not committing to a particular time, whether it’ll be at the end of this year or otherwise,” Dave Gray, vice president of 401(k) client experience at Charles Schwab, told IndexUniverse.

A spokesman for the Charles Schwab said the firm plans to be in the market aggressively in the next few months after ironing out a few regulatory issues.

Questions persist as to whether trading ETFs intraday are really necessary for retirement plan participants, but there’s little doubt that the low costs and transparency of ETFs are likely to be welcome additions in the world of 401(k)s. After all, 401(k)s have long been dogged by high fees that aren’t clearly disclosed. Moreover, the effects of new U.S. rules requiring more reporting of 401(k) expenses to plan participants aren’t yet clear.

Gray emphasized that the platform’s delay wasn’t linked to issues related to fractional shares, long considered one of the more vexing challenges to anyone looking to integrate ETFs in 401(k)s. Fractional shares an issue in the retirement space because the entire 401(k) and 403(b) recordkeeping platform is designed around the open-end mutual fund.

“We have worked through and developed our approach to be able to fractionalize ETFs so that participants can benefit from the ETFs without worrying about having enough money coming in to be able to buy ETFs. Often, folks who are naysayers of ETF solutions will say that’s the problem, but we have developed our own approach to doing that,” said Gray.

Charles Schwab initially turned heads within the retirement space in March 2011 when Jim McCool, executive vice president of client solutions at Charles Schwab, told attendees at an asset management conference that the firm intended to develop an all-ETF retirement platform.

There are lingering questions whether index ETFs in retirement plans are redundancies because firms like Vanguard already offer index strategies in mutual funds wrappers within 401(k)s, thus negating the need for index ETFs in 401(k)s.

Since then, the firm has delayed its planned launch to introduce relatively cheap ETFs into 401(k) plans at least twice.

Gray said Schwab isn’t worried about its growing presence in the ETF space taking a bad PR hit because of the delays.

“We think most of our competitors are focused on skating to where the puck is and not where it’s going. We feel very comfortable with our approach, and we will be the industry leaders in intraday trading in 401(k)s,” he said.

Charles Schwab currently ranks 10th on IndexUniverse’s latest issuer table, with $14.4 billion in total assets spread out among 21 funds, including the firm’s biggest offering: the $2.3 billion Schwab U.S. Broad Market ETF (SCHB | A-99).



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