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Schwab 401(k) plan’s costs fall 80 percent

Schwab Retirement Plan Services says that employees who enrolled in an all-index fund 401(k) plan launched by the company about a year ago saw the expenses on their funds drop nearly 80 percent.

The company said last week that fund expenses for investors in the plan, dubbed Schwab Index Advantage, fell 77 percent to $14.78 per $10,000 invested.

Before moving to an all-index fund approach, Schwab says the weighted-average operating expense ratio on these investors’ 401(k) plans was $65.11 per $10,000 invested.

“Investment costs are significantly lower in these plans, which can positively impact the amount individuals can accumulate during their career,” said Steve Anderson, Schwab Retirement Plan Services’ executive vice president.

Schwab rolled out the plan to draw more investors, many increasingly wary of investing fees and looking to reduce costs.

The trend has made index investing more popular, because index funds do not carry the higher fees of actively managed funds.

In calculating the expense reduction, Schwab made no adjustment for how the funds performed.

Index funds seek to match the market by tracking an index, such as the S&P 500, rather than trying to beat it.

There’s no one picking the investments, so costs are lower.

And a wealth of research has shown that a fund’s expenses are almost always a more significant factor in long-term returns than any advantage a manager can achieve.

The Schwab Index Advantage plan is available to employers with retirement plan assets of $20 million or higher.

It uses Schwab’s own branded funds as well as those of other large well-known fund providers offering a range of equity sizes, styles, and geographies as well as bonds and other asset classes.

Since its debut, the plan has been selected by 50 employer-sponsored 401(k) plans with more than $4 billion in assets and more than 36,000 participants, Schwab said.

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