The Next "Best Thing" in Plan Offerings?

On January 30, TD Ameritrade announced a turnkey, registered investment adviser (RIA)-managed retirement plan program, and on February 5, Schwab Retirement Plan Services launched a full-service 401(k) program using only exchange-traded funds (ETFs).

“We believe, with the momentum ETFs have garnered in the marketplace in the last six to 10 years, it’s a mistake to ignore them for the retirement plan industry,” Steve Anderson, head of Schwab Retirement Plan Services, tells PLANADVISER. “We’ve had 30 years where mutual funds have been the dominant player, and it is time to challenge thinking and see where 401(k)s can go in the future.”

Anderson said the Schwab offering is a philosophical shift, and the solution’s attractiveness to plan sponsors will be philosophical in nature, with those who believe providing advice as well as low-cost investments is an important draw to the product (see “Schwab Introduces All-ETF 401(k) Platform”).

Meanwhile, TD Ameritrade says just 5% of RIAs service a meaningful number of 401(k) plans, but recent regulatory changes designed to enhance investor protections have tilted the playing field in the favor of RIAs. The U.S. Labor Department now requires retirement plan providers fully disclose their services, compensation and fiduciary status. TD Ameritrade says more employers, as they gain better access to fee and service disclosures, will shift retirement plans to RIAs, where advisers are held to a rigorous fiduciary standard of care (see “TD Ameritrade Unveils Plan Solution”).

Skip Schweiss, managing director at TD Ameritrade Institutional and president of TD Ameritrade Trust Company, in Denver, Colorado, tells PLANADVISER, “We think fiduciary advice is the best way to go for plan participants. Most business owners are not investment experts, so we think fiduciary advisers can provide the best offering.”

Schwab’s platform also offers advice via a managed account using GuidedChoice Asset Management or Morningstar Associates. TD Ameritrade defers all investment advice to independent investment advisers.

TD Ameritrade Institutional has been in the business of offering a custody platform for RIAs for 18 years; it more recently began bundling in recordkeeping and plan administration services to make it simpler for advisers and plan sponsors to choose the firm for retirement benefit offerings. The new program offers RIAs a single point of contact for all their 401(k) plan-servicing needs, combining recordkeeping, asset custody and third-party administration from TD Ameritrade Trust Company.

“Advisers should provide advice, and we offer all back office work to take that burden off of them,” Schweiss says.

Anderson estimates a 401(k) plan using index ETFs can reduce investment expenses by more than 90% compared to a typical 401(k) plan that primarily uses actively managed mutual funds, and by more than 30% compared to a 401(k) plan that uses index mutual funds. He tells PLANADVISER Schwab believes offering a mix of mutual funds and ETFs can be confusing to participants due to different timing for trade settlements and varying investment expenses.

Schweiss says TD Ameritrade thinks the customer should decide what investments are best for their plans. Its new program offers an open-architecture platform, with unbundled access to more than 13,000 mutual funds and more than 1,000 ETFs, as well as access to TD Ameritrade’s self-directed brokerage platform.

Another distinction between the two new offerings is that Schwab’s plan will be marketed directly to plan sponsors as well as through advisers. TD Ameritrade sells its retirement plan services exclusively through independent advisers. Schweiss explains that its program not only helps plan sponsors save, but helps advisers build their businesses. “Our mission is to support the success of advisers,” he says. “With this offering, more fiduciary advisers will pursue retirement plan clients.”

Both providers believe their products to be the next “best thing” in retirement plan offerings. Ultimately, it will be up to plan sponsors to decide.