Toward a Simpler, Better 401(k)
We’ve never hesitated to discuss the challenges facing 401(k) today. Some recent statistics from Schwab add fuel to the fire. Three out of four participants aren’t on track to meet their savings goals. 87% don’t think they’ll have enough money to retire. Confidence in a comfortable retirement is at an all-time low.
In response, Schwab has chosen to “rethink the 401(k)” by creating a new type of retirement plan that is at once simpler, more cost-effective, and more effective in terms of outcomes than anything on the market. How? You can read the details about their Schwab Index Advantage (SIA) offering here. But as Jim McCool, Schwab’s EVP of Institutional Services, puts it, the approach comes down to “focusing on the two things that really matter: low cost and independent advice.”
Less complexity, lower cost
Schwab keeps costs low by only using index funds (their own and others) in SIA plans. While there’s always that one person in the office who wants to see their favorite funds in the lineup, almost everyone else – participants and industry experts alike – has seen the wisdom of indexed investments. The combination of low operating expenses and simplicity is hard to beat for the everyday investor. Investing in entire markets is particularly sensible given the long-term nature of most retirement planning.
An index-only approach also makes life easier for the employer by eliminating the fund evaluation and selection process. And with an eye toward the growing popularity of ETFs, there’s an ETF-only version of these plans in the works.
Advice for everyone
The other half of the formula is to provide independent investment advice for every participant in every SIA plan. Recent research has clearly shown that participants who take advantage of such advice tend to save more, diversify better, and stay on track with their chosen strategy, even in volatile markets.
We couldn’t agree more – because if you haven’t heard or guessed by now, GuidedChoice has partnered with Schwab to provide this advice. The same professional advice that we’ve already offered to five million individuals, including many current Schwab plan participants, now powers the SIA advice component.
As always, our advice is personalized based on each participant’s age, income, account balance, and other factors. It’s specific to the index funds available in their plan, recommends a savings rate as well, and is adjusted regularly for the life of the account.
Even if we weren’t involved in the project we’d still think this is a major step forward. Philosophically we’re very much aligned with Schwab. Our business is also about leveraging technology to keep fees low, value high, and ease of use paramount. Our relationship has been productive and valuable for both companies, and we’re excited about taking it to the next level.
We agree that it’s long past time to rethink the 401(k), and that advice must be part of the answer. According to Schwab’s numbers participants who use advice see better outcomes 87% of the time, and for a worker starting at age 45, advice can boost retirement savings by 70%. But they also reveal that only about 10% of employees who have access to professional advice actually take advantage of it.
We's like to see that number reach closer to 100%. Making advice the cornerstone of a 401(k) plan, rather than an option or add-on, gives participants a big step up toward getting there.
Is simpler simply better? As always, your comments are welcome.