Discount broker Charles Schwab has opened a new kind of office in Dripping Springs, Texas. Don’t worry if you didn’t hear about it. I only noticed because that’s where I live.
Both Schwab and Fidelity have traditional offices in Austin. That’s what you would expect: It’s where the money is. Dripping Springs, on the other hand, is a very small town, most often identified by a stoplight at the intersection of two highways.
So what’s going on? The new Schwab office is part of a new opportunity that is developing for frustrated savers and investors. Most of Schwab’s 300 offices, like Fidelity’s 170 offices, can be found in major urban areas. This office is one of the first of an expected 300 new offices to be operated by individuals as franchise ventures.
By expanding with smaller offices, Schwab is taking a major step toward offering an alternative to conventional brokerage and financial services to just about everyone. Schwab is bringing the cost structure of discount brokerage — the business it pioneered — to places that previously have been served only by high-cost brokerage offices and other high-cost selling methods, such as insurance.
The second part of this opportunity is Schwab’s recent announcement of going further into the world of low-cost, commission-free exchange-traded-funds. After startling the industry at the beginning of 2011 by announcing that its own ETFs would be offered commission-free, Schwab is now offering a broader selection of its own ETFs at costs that are lower than the equivalent ETFs at Vanguard. (Significantly, the expenses for iShares ETFs have also just been cut, bending to the power of Vanguard pricing.)
Here are some examples:
• The Vanguard Total Stock Market ETF (ticker VTI) has an annual expense ratio of 0.06 percent. Schwab has priced its equivalent fund, the Schwab Multi-Cap Core ETF (ticker SCHB) at only 0.04 percent.
• Vanguard’s Short-Term Treasury Inflation-Protected Securities ETF (ticker VTIP) is priced at 0.1 percent, while Schwab’s equivalent ETF, the Schwab U.S. TIPS ETF (ticker SCHP), is priced at 0.07 percent.
• Vanguard’s MSCI EAFE ETF (ticker VEA) has an expense ratio of 0.12 percent. Schwab’s equivalent ETF, Schwab International Large-Cap (ticker SCHF), has an expense ratio of only 0.09 percent.
Anyone with a $1,000 deposit can open a checking account and an IRA account, set up direct deposit of his or her paycheck to the Schwab checking account and arrange for automatic monthly purchases in an IRA account. The same worker can then create what could be called a simple “Couch Potato” portfolio (50 percent Total Stock Market, 50 percent TIPS), and the cost of the plan is only 0.055 percent. Get more complicated and build my Couch Potato Margarita portfolio (? Total Stock Market, ? International stocks, ? TIPS), and the cost is still under 0.07 percent.
This is a big deal. At the risk of sounding hyperbolic, it is like being released from decades of bondage to expensive defined-contribution plans. It means that virtually anyone, anywhere, can now have a retirement savings plan at a cost that rivals the biggest and most cost-efficient plans in the country — the plans at places like IBM, Exxon-Mobil and Texas Instruments.
Over a 35-year contribution period, I estimate that keeping more of the return on your money will accumulate 20 percent more retirement assets than plans that cost 100 basis points (or 1 percentage point) a year. It will accumulate about 45 percent more than plans that cost 200 basis points (or 2 percent) a year.
You can benefit from this if you answer yes to these three questions:
• Does your employer-sponsored 401(k) or 403(b) plan have a cost burden of more than 1 percentage point a year? (This will be most teachers in 403(b) plans and most workers in small plans.)
• Is there no employer match for your contributions? (Employer match can compensate for high plan costs, but many plans don’t have an employer contribution.)
• Do you contribute $5,000 a year or less to your current plan? While contributions to 401(k) and 403(b) plans are limited to $17,000 a year, or $22,500 a year if age 50 or older, IRA contributions are currently limited to $5,000 a year, or $6,000 a year if age 50 or older.
Since most workers contribute 6 percent to 8 percent of their income to retirement plans, it’s a good bet that many workers who earn up to about $80,000 a year would benefit by taking advantage of new cost reductions for basic exchange-traded funds.
That’s a whole lot of people.
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