MutualFundWire.com: Schwab Opens Up its Target-Date Mix to Third-Party Funds

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Monday, April 20, 2009

Schwab Opens Up its Target-Date Mix to Third-Party Funds

Charles Schwab Investment Management is adding third-party funds as underlying investments within its target-date funds. Schwab also cut the expense ratios on the funds by 13 to 23 basis points.

Peter Crawford
Schwab
SVP for Investment Management Services

Schwab offers seven target-date funds. Previously, the funds carried expense ratios ranging from 84 to 89 bps. Now, Schwab is charging between 61 to 76 bps.

In addition, Schwab tweaked the asset allocation glide path to be more conservative as investors get closer to retirement, while adding equity exposure in the early years. It extended the glide path for an additional five years to continue 20 years after the target retirement date.

The changes stemmed from "an overall review we did across all of our products starting last year," said Peter Crawford, senior vice president for investment management services, in an interview with The MFWire.

As for the addition of third-party funds (previously the underlying investments consisted solely of Schwab and Laudus funds), Crawford said: "We're trying to make these funds all-weather funds."

He declined to comment on the identities of the third-party managers.

Adding external offerings would improve style diversification and provide access to additional asset classes, he said.

"We don't have a true growth offering," Crawford said.

As for the glide path adjustment, Crawford noted that the events of last year made many people realize that they're more risk-averse than they initially thought.

"We want to make sure we're reflecting that," he said.

Schwab's seven funds held a combined $550 million of assets as of last week. The San Francisco-based firm distributes the funds mainly through the retail and RIA channels.

Company Press Release

SAN FRANCISCO--(BUSINESS WIRE)--Charles Schwab Investment Management, the asset management arm of the Charles Schwab Corporation, today announced strategic changes to its target-date mutual funds to enhance the portfolios and reduce expenses. The aim of these enhancements is to help investors more effectively achieve their long-term retirement savings goals.

The changes include reducing expenses charged to investors by roughly 13 to 23 basis points, adjusting the asset allocation “glide path” to be more conservative as investors approach retirement while adding equity exposure in the early years, and adding index strategies and third-party investment adviser funds to the selection of underlying funds invested in by each of the seven target-date portfolios.

"We conducted a strategic review of our Schwab Target Date mutual fund lineup to evaluate the best investment approach given market conditions and investors' changing long-term expectations and current interest in more conservative investment options," said Peter Crawford, senior vice president for investment management services. "We emerged from the review confident that our funds remain strong and competitive, but we also identified several changes we could make to improve them and help investors meet their goals in various market environments."

The specific enhancements announced today by Schwab in its Target Funds include: * Reducing expense ratios by an estimated 13 to 23 basis points * Higher fixed income exposure beginning ten years from target date, to help increase protection of principal and generate periodic income approaching and during retirement * Adding third-party funds managed by third party investment managers for improved style diversification and enable access to additional asset classes * Higher equity exposure in early years of funds, with the goal of building wealth before target date. * Extending the “glide path” for an additional five years to continue 20 years after target retirement date

Jeff Mortimer, senior vice president and chief investment officer for Charles Schwab Management, noted that “the Schwab Target 2040 Fund (SWERX) was recently honored by Lipper1 for best consistent performance over three years in its category, and that both the Target 2030 and Target 2040 funds earned an overall rating of five-stars by Morningstar2. With these changes we believe we can be even better across all seven portfolios, providing investors with continuing opportunities to achieve returns suited to their financial goals."

The Schwab Target Date Funds are designed to offer a one-fund solution with good value and asset allocation based on the anticipated year of retirement. They offer clients a diversified portfolio of holdings in underlying Schwab Funds, Laudus Funds and now third-party investment managers, professionally managed and rebalanced with the target date in mind. For more information on the changes to the Schwab Target Funds, visit http://www.schwab.com/target or call 1-877-682-6461.