Though 58% of Americans admit to not having a plan for retirement and 39% admit that what they have is insufficient, according to research by Deloitte, 57% prefer to handle their finances without help, and 38% say they don’t need help. Into that void have stepped a number of providers offering advice to participants, including Schwab and Vanguard. But advice is not free, whether offered through outside services or through investment advisers, and it’s hard to get participants to take advantage of it.
Schwab’s service is off to a good start, with only 50 plans but $4 billion in assets in their first year. Geared for plans with more than $20 million, it offers index-only funds (and soon ETFs), saving what it claims to be 50 BPs. However, their advice costs 45 BPs — making up most of the difference. Ninety percent of participants are enrolled in the advice service — but only because there’s a negative election.
Vanguard’s new product, “Retirement Plan Access,” launched in October 2011, has been sold to 800 plans with $1.3 billion of assets. It also uses index funds, lowering prices almost 100 BPs from the industry average in the under $25 million category. One-third of Vanguard plans were sold through RIAs, who have the option of either providing advice charged directly to the plan or allowing the company to select a Morningstar advice option for 45 BPs.
So while the industry’s increasing focus on outcomes is refreshing, the right solution is not clear. Vanguard and Schwab seem to think that keeping fund prices low by using passive strategies while making up much of the difference by charging for advice is the right way to go, but there’s not enough data to prove their assumption, and sales are relatively modest.
Add to this debate the question of what the advisor’s role is if only passive strategies are used in conjunction with a third party advice service.
