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Schwab reins in target date fund expenses, goals

Charles Schwab Investment Management Inc. today announced changes to its target date fund series, including a reduction in expenses and a shift to a more conservative allocation.

Charles Schwab Investment Management Inc. today announced changes to its target date fund series, including a reduction in expenses and a shift to a more conservative allocation.
The expense ratios for its seven target date funds have been reduced by between 0.13 and 0.23 percentage points, the San Francisco-based firm said, making the new expense ratios fall within a range of 0.61% to 0.76%, depending on the portfolio.
Also, the asset allocation glide path is being shifted to become more conservative as the investor approaches retirement, while adding equity exposure in the early years.
In addition, the funds are adding index strategies and third-party investment adviser funds to the selection of underlying funds.
“We are bringing in more index funds which are lower-cost,” Peter Crawford, senior vice president for investment management services, said in an interview. “We are also waiving all of the third-party expenses.”
Previously, the funds used only proprietary or subadvised funds.
“We will bring in some third-party funds to give us exposure to some additional asset classes and expertise,” Mr. Crawford said.
The revised allocations will make the glide path steeper and increase exposure to fixed income as the investor approaches retirement, he said.
For example, a fund with a goal of 50% equities and 50% fixed income will be revised to a goal of 40% equity and 60% fixed income, Mr. Crawford said.
The changes weren’t made in response to the market downturn, and the review of the strategies began more than a year ago, he said.
“We want to make sure we are well-positioned going forward,” Mr. Crawford said. “Across the industry, investors are re-evaluating their appetite for risk.”
More fund firms are likely to announce changes to their target date strategies, said Burton Greenwald, a Philadelphia-based mutual fund consultant.
“I think it’s much more likely that you will see firms setting up target date funds that hit their final asset allocation three to five years earlier than the target date with the expectation that this is a way to preserve capital,” he said. “That glide path is going to get much steeper, and fixed income will grow to a larger percentage of the overall assets.”
Mr. Greenwald also said that the industry may see a trend toward the inclusion of some form of guarantee.
“I think you’ll see some sort of income option at the retirement date allowing you to annuitize a portion of the assets to provide a reliable, guaranteed income stream at the retirement date,” he said.
Schwab’s target date funds had $462.79 million in assets as of March 31.
Charles Schwab Investment Management, a division of The Charles Schwab Corp., had $236 billion in assets under management as of Dec. 31.