Schwab’s New 401k Play

At the 401kWire Influencers Summit we were treated to a presentation by Schwab’s Jim McCool on the next (4th) generation of the 401k.  Jim is the EVP of Institutional Services at Schwab and his presentation was about the evolution of the 401k indsutry as Schwab sees it.

Jim is a great platform guy and he gave a presentation that highlighted the need for two things:

  • Low cost investment options (in Schwab’s case, their own ETFs)
  • Better advisory services for participants

This is not Jim McCool and probably not a financial advisor either. Good chance he

Thankfully, Jim kept the slides simple and visual (it was post-lunch) and his presentation used the concept of “piloting participants,” which came naturally for him since he is, in fact, a pilot. As most presentations do, Jim started off with the pain points, which are pretty familiar:

– 3 in 4 Americans are not on track for retirement

– More participants think their 401k plan is more complex than their healthcare plan

– Only 1 in 10 participants receive advice, though when they do, their outcomes are dramatically better

Then Jim got in to some numbers that I thought were interesting (being a recordkeeper, Schwab must have access to current data)- for a mid sized plan (I’m guessing around $20mm), the all-in cost for services is 55-95 BPS.  If you add advice to that, the cost for the same plan can almost double (+60 BPS) to 115-155 BPS.

Jim then cited a report from Financial Engines and Hewitt on the impact of receiving help through a retirement plan.  It’s a pretty fascinating report that you can download at  One of the key findings Jim highlighted illustrated the potential outcome of a “Help Participant” versus a “Non-Help Participant” after 20 years, where each invests a lump sum of $10,000 at age 45:

“Assuming each receives the median returns identified in this report, the Help Participant could have 47% more money at age 65 ($33,000) than the Non-Help Participant ($22,500)”
My impression was that Schwab is trying to essentially plant a stake in the ground in the presence of the other major players in the industry around a more full service model from providers, where they couple low cost proprietary investments (Schwab ETFs) with a network of advisors who can work individually with participants to help them save more (more AUM for Schwab) and better allocate their investments (into Schwab funds I’m guessing).
While Jim was a bit lean on details when pressed in the Q&A, it raised some questions for me:
  • Where will all the advisors come from?
    Will Schwab repurpose their existing brokers through education (TRAU, for example) so that they’ll be qualified to work with participants and plan sponsors?  The acquisition of NRP by LPL made sense as a way to create a pipeline for the 12,000 independent LPL advisors into the workplace.  Where will Schwab get the bodies?  Will they set up a similar referral strategy to what they’ve created with wealth managers?
  • What role does independence play in this model?
    Besides fee transparency and improving plan outcomes (a topic of discussion since the inception of the 401k), independence is a key trend.  Though it will take a while, the shift is clearly toward the independent fiduciary advisor in the 401k industry (though as the person sitting next to me during the 401kWire event pointed out, what happens when smaller independent advisors who do not have significant financial reserves start getting sued by plan sponsors and/or participants?  Insurance I guess…).  How does Schwab’s model account for independence?  I’ve had a Schwab account in the past and found that the advisor that was assigned to me only gave me fund tips based on what was performing at the time.  I didn’t have a real connection with this guy and he didn’t deliver any real value, short of saving me 30 minutes of research time on their site (30 minutes that I had to spend traveling to their office).  How deeply will participants trust their advisor if they know the advisor isn’t an independent?
  • Who will pay for the extra BPS?
    Do plan sponsors want to add on 60BPS (if that’s what it’s going to cost) in order to have an advisor deliver advice in a workplace setting?  That seems like a bit of a hard sell in this environment and I don’t think plan sponsors will care that much unless they are mandated to improve their outcomes.  What technology innovations will Schwab leverage to bring down the costs?  On the back of a recent Schwab publication, I saw Charles Schwab sitting in a chair with an iPad in hand. Is that a hint?
I’d have to admit that this kind low cost investment + advisor advice model makes sense and certainly positions Schwab for capturing rollover assets once it’s time to retire or change jobs.  I’m sure we’ll get more information as Schwab rolls it out later this year.  For now, we’ll have to fly in the dark.