Jake GilliamTarget-date funds [TDFs] have fast become one of the most
popular investment options in defined contribution [DC] plans. There’s still no
consensus, though, on what makes an optimal target-date fund in terms of its
glide path, investment management approach [active versus passive], or
structure [mutual fund or collective investment trust funds]. PLANADVISER
recently asked Jake Gilliam, senior multi-asset class portfolio strategist for
Charles Schwab Investment Management, what plan sponsors and advisers want
today from TDFs, and how Schwab is responding.
PA: How have plan sponsors and advisers changed the way they
evaluate target-date funds since the 2008 financial crisis?
Jake Gilliam: Both are evaluating target-date funds much
more thoroughly. Having heard from plan participants about what types of market
swings make them uncomfortable, and having seen the Department of Labor [DOL]’s
selection tips for plan fiduciaries1, sponsors want to better
understand their fund’s glide path and underlying investments, and any risks
their funds present that maybe sponsors hadn’t recognized in the past. This is
spurring some plan sponsors to move away from funds they’d selected over a
decade ago, and into funds that better fit their plan and are more in line with
the DOL’s target fund selection tips for plan fiduciaries.
PA: How is Schwab responding to this shift?
Gilliam: We offer multiple target-date solutions that very
much align with the DOL’s tips. Sponsors can choose funds that employ a mix of
active and passive management or fully passive management, in either a mutual
fund or bank collective investment trust structure.
And, for some of the underlying active strategies that the
target-date funds invest in, we have partnered with outside firms to bring
additional active management capabilities beyond our own proprietary funds, to
provide even further diversification and flexibility.
PA: Finding the right glide path for a target-date fund
remains one of the fundamental challenges for plan sponsors and fund providers.
What’s Schwab’s approach?
Gilliam: We build our glide path based on a very deep
knowledge of the individual investor, and make sure it is aligned with their
changing risk tolerance as they age.
Younger investors who have very little financial capital,
but plenty of time to earn and save, will have a higher exposure to equities
with our glide path than they will with our typical industry peer. At and near
retirement, by contrast, their portfolio will be more conservative than is
typical with our peers because that’s when participant risk tolerance is
lowest. Our glide path is also a “through” glide path, meaning we don’t abandon
an investor once they retire but continue to adjust their portfolios to match
their changing risk profile well into their retirement years.
PA: If there’s anything plan sponsors and advisers care
about more than performance and glide path these days, it’s fees and fee
transparency. What is Schwab doing to address these concerns?
Gilliam: Schwab has long been an advocate for investors and
is known for driving down costs in the industry. For example, we’re now
offering Schwab Bank’s fully passive, index-based collective trust target-date
fund to plan sponsors with no minimum investment for just eight basis points
[bps]. That’s down from 18 bps when we launched those funds in 2009.
Additionally, our bank collective trust target-date funds that offer a mix of
active and passive sub-advised strategies originally had a price point of 89
bps for all plans, we now have five share classes with fees as low as 35 bps.
Finally, we just launched the Schwab Target Index Funds at 8 bps, with no
minimum for employer sponsored retirement plans, which ranks them as the lowest
cost target-date mutual funds available in the industry.
PA: Do you have anything else planned to meet the shifting
needs of plan sponsors?
Gilliam: We have a fairly new development with the addition
of a product to our well-established target-date suite. As mentioned, we
recently launched a new mutual fund target-date product that is fully passive,
again for 8 bps with no minimum for retirement plans. It is comprised primarily
of Schwab’s low cost ETFs [exchange-traded funds] as underlying investments.
This new target-date offering builds on our success in the ETF arena, and our
long history of managing target-date funds. We believe these new funds will
have strong appeal to employers and retirement plan participants, as well as individual
1 Target Date Retirement Funds —Tips for ERISA Plan
Fiduciaries, U.S. Department of Labor, February 2013.
Investors should consider carefully information contained in
the prospectus, including investment objectives, risks, charges and expenses.
You can request a prospectus by visiting www.csimfunds.com. Please read the
prospectus carefully before investing.
The values of the funds will fluctuate up to and after the
target dates. There is no guarantee the funds will provide adequate income at
or through retirement.
Target date funds asset allocations are subject to change
over time in accordance with each fund’s prospectus.
Charles Schwab Investment Management, Inc. (“CSIM”), the
investment advisor for Schwab’s proprietary funds, Charles Schwab Bank, and Charles
Schwab & Co., Inc. (“Schwab”) Member SIPC, the distributor for Schwab
Funds, are separate but affiliated companies and subsidiaries of The Charles
Schwab ETFsTM are distributed by SEI Investments Distribution
Co. (SIDCO). SIDCO is not affiliated with The Charles Schwab Corporation or any
of its affiliates.
Information is based on fees listed in each Fund’s prospectus
as of 9/6/2016.