In an unprecedented move, Charles Schwab sent notice to 401(k) clients worth a total of more than $25 billion that it was terminating their relationships because the record keeper was not allowed access to plan participants. In effect, Schwab is willing to lose the entire book of business it purchased from Nationwide when it bought the 401(k) Company in 2007 for more than $100 million. Some clients, including the Southwest Airlines Pilots Association, have acquiesced; others are contemplating their next move.
In an era when 401(k) record keeping fees have been declining steadily in a low-margin business for smaller plans and larger plans in which margins are only getting lower, many providers have ulterior motives. These include selling proprietary funds or, like Schwab, capturing rollovers — a much higher margin business where margins remain healthy.
Experts have stated that Schwab is losing money on these plans. So in effect, the move is another form of industry consolidation.
But the IRA rollover market is clearly in the sights of regulators and lawmakers, as evidenced by the recent notice from FINRA about suitability standards and previous notices about potentially misleading marketing practices about fees and the DOL’s redefinition of fiduciary rule, as well as calls from members of Congress to review misleading sales tactics in the wake of last year’s GAO study.
With $6.2 trillion in IRAs, much of which comes from DC plans, this market is very important to record keepers like Schwab, with retail brands and consumer marketing capabilities (as well as a physical presence in hundreds of locations) that can actually capture rollovers, as well as many advisors who constructed their practices on wealth management and have built relationships with plan participants.
As Baby Boomers retire, driving the greatest wealth transfer in history, the fight over who gets the rollovers has started. Schwab has made a bold and strong statement.
