The Markets May 5, 2009

Charles Schwab Slashes Expense Ratios

Charles Schwab Investment Management today announced it has moved all equity and bond funds to a single share class priced at the lowest level.
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In addition to cutting its expense ratios, the firm has made the minimum investment for all of its funds $100. Regardless of investment size, all investors will have the same expense ratio. For instance, the Schwab S&P 500 Index Fund (SWPIX, SWPPX), will move from having the lowest expense ratio of 0.19% and the highest expense ratio of 0.36%, to expense ratios for every share class at 0.09%.

Schwab funds will continue to be distributed with no loads, the company said. For financial advisers, the lowered expense ratio will not make a difference in compensation structure, as advisers receive the same compensation regardless of the fund, said Peter Crawford, senior vice president of Investment Mangement Services at, speaking at a Schwab press event in New York City.

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In fact, financial consultants/advisers were in mind with this change, noted Randy Merk, president and CEO of Investment Mangement Services. He said the initiative will give advisers something positive to help “mobilize clients.’

The firm’s motivation for the fee reductions is to stay competitive and keep clients invested for the long-term, Merk said. “If we make our clients happy, they’ll tell a friend,’ he said. He emphasized that the changes are permanent and not a promotion.

Last month, Charles Schwab announced changes to its target-date funds, including lower expense ratios and asset allocations that add more exposure to fixed-income beginning 10 years from the target date (see “Schwab Makes Target-Fund Enhancements’).

Looking Forward

At today’s event, Merk said Charles Schwab hopes to unveil a series of proprietary exchange-traded funds (ETFs) by the end of the year, pending approval by the Securities and Exchange Commission (SEC). “We’re a major player in ETFs, and we want to be a bigger player in ETFs,’ he said.

Charles Schwab has not yet joined the handful of recordkeepers offering guaranteed income products in the last couple years (see “The Inside Story’). Merk told PLANADVISER.com that Charles Schwab has considered offering a guaranteed income solution, but shelved it last year. He said they feel cautious because it is a product that might offer too much promise. With that said, they continue to be in the “laboratory,’ as plan sponsor clients are interested in access to a guaranteed product, he added.

Photographed: Randy Merk

Compliance May 5, 2009

12b-1 Fees, Target-Date Funds to Get SEC Attention

Speaking at the Mutual Fund Directors Forum Annual Policy Conference in Washington, Securities and Exchange Commission (SEC) Chairman Mary Schapiro said she is “committed to a meaningful and open-minded review of rule12b-1.″
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In her speech, Schapiro said “Rule 12b-1 is an area in need of re-consideration, and the SEC will pursue that re-consideration with the interests of investors first and foremost in our minds.”

The timing of the review of the 12b-1 rule will have to be prioritized among other items on the SEC’s reform agenda, she noted, and therefore, while it might not be in the next month, “12b-1 reform is an issue that deserves and will receive SEC attention.’

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Earlier this year, at the Investment Company Institute’s 2009 Mutual Funds and Investment Management Conference, Andrew J. Donohue, director of the Division of Investment Management at the SEC, said the change in the market over the past two years necessitates a change in the Commission’s regulatory agenda and that the SEC is deferring “wholesale reconsideration of rule 12b-1’ (see “SEC Says Market Condition Changes 12b-1 Reform Plans’).

Target-Date Funds

Another area Schapiro said the SEC is examining is target-date funds, saying the SEC “will consider whether additional measures are needed to better align target date funds’ glide paths and asset allocations with investor expectations.’ She also said that the SEC staff has been working with the Department of Labor.

Schapiro touched on the growth in target-date funds and their popularity as default options in 401(k) plans. However, she called the returns of the 2010 target-date funds “troubling,’ noting that returns of 2010 target-date funds ranged from – 3.6% to – 41%.

While acknowledging that the varying glide path assumptions might lead to those outcomes, she said those assumptions built into the glide path must be disclosed. The SEC is reviewing target date funds’ disclosure about their glide paths and asset allocations, she said, and is also looking at whether the same target-date funds underlie both retirement and college savings plans, noting that those using such a fund in a 529 plan, for example, would need access to their investment at or near the fund’s target date, unlike some of the glide path assumptions for retirement. Schapiro challenged target-date fund directors to review the asset allocations and investments in their funds, and to consider “whether your target date funds’ asset allocations and investments are consistent with investor expectations.’

“Among other issues, we will consider whether the use of a particular target date in a fund’s name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund’s name,’ she said.

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