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Rating:Active Managers are Left Out of Schwab's Next Gen 401k Picture Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, March 10, 2011

Active Managers are Left Out of Schwab's Next Gen 401k Picture

Reported by Armie Margaret Lee

The news coming out of Schwab's 401(k) unit is not music to active managers' ears. In what is sure to ignite several more rounds of the long-running active-versus-passive debate, Schwab is preparing to launch what it calls a "next-generation 401(k)," which consists of low-cost investment vehicles paired with advice.

Jim McCool, head of Schwab Institutional, talked about the new strategy during his keynote address yesterday afternoon at The 401kWire Influencers' Summit at the Mandarin Oriental in Las Vegas.

Schwab plans to launch an index fund-only option later this year and an all-ETF version next year.

"There are two absolute certainties that drive retirement income and outcome in a positive way," McCool said. "Our conclusion is only two things matter: cost and advice."

He noted that 85 percent of the $2.8 trillion of 401(k) assets are in more expensive actively managed strategies. He also pointed out the low usage rates of advice among plan participants.

"Too much cost mixed with too little advice, as we see it, is a poison cocktail that millions of participants today are drinking," he said.

Schwab estimates that the next gen 401(k) can lower participant expenses by 35 to 85 percent.

McCool anticipates that Schwab's new strategy will trigger debates, including the classic active-versus-passive battle.

"But it misses the point about the impact of costs that's a certainty in this business. You can't predict certainty with returns, but you can predict certainty with expense," he said.  

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