Schwab Investment Committee: Fill & Download for Free

Short answer: The two employees managing the mutual fund are fiduciaries to you, since you are a shareholder of the fund.There are a lot of cooks in the 401(k) kitchen, so here’s my best attempt at a “short” summary.You: You are the plan participant. You want to invest money for the future, and you value the benefit offered by an employer to let you invest using a tax-advantaged 401(k) plan, often with the incentive of matching contributions made by your employer.Your employer: Commonly identified as the 401(k) plan sponsor. Your employer is responsible for performing due diligence on 401(k) plan providers (see below) and selecting a plan provider(s) that meet the needs and desires of the business AND certain standards established by ERISA[1]. Your employer pays the plan provider recurring fees for the services rendered by the provider. In most cases, your employer doesn’t pass on these fees to you, but your employer most certainly accounts for these fees in the total cost of your employment.Plan provider (or third-party service provider): This is generally a third party financial institution that manages the administration, record keeping, trust and custodial accounting, and documentation responsibilities required by ERISA [2]. Well-known institutions that are plan providers include Vanguard Group, Fidelity Investments, Charles Schwab, and thousands of others.Plan providers charge recurring fees for their services that, in general, your employer pays (the same fees I mentioned above). Some plan providers also charge fees directly to plan participants (e.g. you), which are generally flat fees charged quarterly or annually for account administration. Note that in some cases, plan participant fees are waived once you invest a certain amount money in your account.Plan investment: This is the actual investment vehicle made available to you by the plan provider, i.e. mutual funds and exchange traded funds (ETFs). Your money buys shares in these investment vehicles, and you hope the shares that you purchase go up in value over time.As a plan participant and investor in the investment vehicle, you pay a fee called the expense ratio for every mutual fund and/or ETF that you own in your 401(k) plan account. Expense ratios vary anywhere from 0.045% to 1.5% and up of the dollar amount that you own of the fund, and these are the expenses you pay over the course of one year, and every year, as long as you own the fund. Buried in your plan disclosure documents (also referred to as the Plan and Investment Information for Participant-Directed Plans document) , you should be able to find information on each investment vehicle’s expense ratio.Note: expense ratio fees are not deducted all at once at the end of the year. Each day, the price of the mutual funds and ETFs in your plan changes for two primary reasons.First, the stock market changes, so the price of the investment vehicle changes accordingly. But second, and more relevant to this discussion of fees, the price of the mutual fund decreases ever so slightly, so you effectively don’t even notice the price difference. How slightly? By 1/252 of the expense ratio, or 0.00397 times the expense ratio.Why? Because, on average, the stock market has 252 trading days each year, so each day, 1/252 of the expense ratio is subtracted from the price of your investment vehicle. Like I said, you barely ever notice it because it’s so small. But over 252 trading days, it adds up to the annual expense ratio.Now generally, many plan providers are also in the business of operating their own proprietary investment vehicles (e.g. A Vanguard Group 401(k) plan offers you the ability to choose among a number of Vanguard Group mutual funds), but this is not always true.Some plan providers offer a variety of investment vehicles from a variety of mutual fund and ETF investment providers. In doing so, these plan providers charge a fee to the investment provider, often referred to as a payment for “shelf space.” Why do certain funds appear in your 401(k)’s investment options? Because some of them pay for the privilege to be listed, like the “shelf” at a grocery store (Why are Honey Smacks front and center in the cereal aisle, which the store’s generic low-sugar oats are off to the far right and on the bottom? The answer is partially because of shelf space payments your grocery store receives.)Ok, who’s next?Plan provider representative: This person is an employee of the plan provider, aka a representative. This person works for the plan provider and does not work for your employer (i.e. the plan sponsor), and her/his primary role is helping you with any administrative or account management issues you have regarding your plan. Generally, the plan representative is not acting or assuming the role of your financial adviser, and when asked HOW you should invest your money, the representative must not offer any specific investment advice to you (for example “you should buy fund XYZ because its objective is long term growth).Generic advice is ok, such as “Diversifying your investments across a wide variety of domestic and global stocks, bonds, and real estate investments is one way to reduce the risk of your total portfolio,” because no specific investment recommendations are being made.Who pays the representatives’ salary? The plan provider. And the representative may earn bonuses and other incentives for meeting provider targets, like getting a high percentage of all potential plan participants to make regular contributions to the plan from their paychecks.Oh, is the representative a fiduciary? In most cases, no. This person represents the plan provider, and it’s her/his job to educate you on good financial principles and encourage you to participate in the plan, but she/he is not a fiduciary and is not obligated or required to act in your best interests.Investment (vehicle) manager: This is the person or people who manage the securities, bonds, and other investments actually contained inside each investment vehicle. They are making decisions every day about what to buy and what to sell in order to meet the stated objectives of the investment vehicle (e.g. growth, capital preservation, dividend income, etc.). Some of the duties of investment managers are executed by an investment committee, and investment managers can be responsible for the decisions of more than one mutual fund and/or ETF. Also, even for index funds that have the objective to track a benchmark stock and/or bond index, investment managers buy and sell securities to ensure the fund is as close as possible to matching the characteristics of the target benchmark.Are these investment managers fiduciaries? Yes. Investment managers cannot commit fraud or act against the best interests of the shareholders (i.e. you), and are obligated to act as a fiduciary to the fund shareholders. This does not mean that investment managers are responsible or liable for stock market losses; rather, the fund managers must manage the plan’s investments prudently and in accordance with the stated objectives of the fund.Did I forget anyone? I hope not.If you found this helpful, please give me an upvote, or leave a comment if I mischaracterized any of the layers and the players in the 401(k) plan industry!Footnotes:Meeting Your Fiduciary Responsibilities from ERISAibid

Yes. This is true.I have been trading in the Stock Market for over 30 years as a Stock Broker and Portfolio Manager and it is important to make our decisions on a 6 month expectation of the economy, so we position our securities accordingly. We typically, say, “The Market is 6 months ahead of the news.” (That is, the economic news). As a Portfolio Manager, it is too late and you cannot catch up if you are not positioning your securities in this manner, then by the time the news breaks in 6 months you are a Dinosaur!A good example of this is last quarter of 2018 when the Stock Market fell 19.3% from the high. Most Wall Street Analysts sold down saying, “ We expect a slow down in the economy within 6 months.” So, they wanted to sell ahead of time beating other money managers on pulling the trigger.You can also see this in interest rates. As interest rates move, it is important for us Portfolio Managers to make our decisions and position adjustments 6 months ahead of time in anticipation of where the economy will be. If we do not, by the time 6 months passes, we are too, late to reposition in order for our customers to make money. Every decision we make is, basically, a conjecture (an educated bet) of our 6 month forecasting model.Most Central Banks around the world have 6 month forecasting models, like our US Fed (Federal Reserve Banking Committee). Why? Because they make inputs into the economy, today, expecting how the economy will react and look like 6 months down the road, like raising interest rates to slow down inflation.In conclusion, Yes. Our trading and Portfolio positions are always looking at the economic indicators to anticipate what the US and global economy will look like down the road. For our portfolios, they reflect the view of the economy 6 months in advance.Disclosure: Investing in the Markets have risk of loss of your money and risk of loss of all principal. Registered investment advisor in the states of California, Florida, Georgia and Texas and Tactical Global Portfolio Manager with custodians at Fidelity Investments and Charles Schwab.

LIBOR’s retirement is getting closer.The London Interbank Offered Rate, or LIBOR for short, is scheduled to be phased out at the en d of phased at the end of 2021.Despite this major development that’s occurring in just over two years, LIBOR rates still serve as benchmarks for trillions of dollars in securities across the globe. LIBOR serves as a reference rate for many bond investments, like floating-rate notes, bank loans and some preferred securities. It still serves as a benchmark for many consumer loans as well, including margin loans, pledged-asset lines and variable-rate mortgages.In other words, LIBOR doesn’t just affect investors, but also consumers. If you have a variable-rate mortgage or a pledged-asset line, this transition may affect you.There have been many new developments since LIBOR’s retirement was announced in 2017, as banks and regulators seek to wean the markets off LIBOR rates and into new alternatives like the Secured Overnight Financing Rate (SOFR). Below we’ll cover six key developments that investors should be aware of.LIBOR vs SOFR: BackgroundThe Secured Overnight Financing Rate has gained momentum in the U.S. as the successor to LIBOR rates. In June 2017, the Alternative Reference Rates Committee (ARRC) selected SOFR as its recommended alternative to LIBOR. After months of work, the Federal Reserve Bank of New York first began publishing the rate in April 2018. After a relatively slow adoption, recently issued floating-rate investments have increasingly used SOFR as their reference rate. Meanwhile, issues that continue to reference a LIBOR rate as their benchmark have included more explicit fallback language for when LIBOR is retired.There are some key differences between LIBOR and SOFR. For example, SOFR is calculated using actual transactions and is considered a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. LIBOR, on the other hand, is set by a panel of banks submitting estimates of what they think their borrowing costs are.Meanwhile, SOFR is just one rate—an overnight borrowing rate. LIBOR, on the other hand, has many tenors, ranging from as short as overnight to as long as 12-months. Because SOFR is an overnight rate and three-month LIBOR has a three-month maturity, SOFR has been biased lower. All else being equal, shorter maturities tend to have lower yields.Six key developments in the LIBOR/SOFR transition1. LIBOR’s retirement is happening!“Some say only two things in life are guaranteed: death and taxes. But I say there are actually three: death, taxes, and the end of LIBOR.”2The quote above was from John Williams, president of the Federal Reserve Bank of New York, taken from his recent speech titled “LIBOR: The Clock is Ticking.”Williams isn’t the only person voicing his concern about preparing markets for the coming LIBOR deadline. In a July 2019 speech, Andrew Bailey, head of the UK’s Financial Conduct Authority, concluded by saying that “the base-case assumption should be that there will be no LIBOR publication after end-2021.” He added that “even if LIBOR does continue for a further period after end-2021, it would have changed. There is a high probability it will no longer pass regulatory tests of representativeness.” 3While there’s been a discussion about LIBOR potentially continuing in a different form, officials are warning investors to prepare for a world without LIBOR.In other words, ignore this transition at your own peril.2. SOFR-based issuance has increased. By our count, there have been more than 90 floating-rate bonds issued since April 2018 with SOFR as the reference rate, totaling more than $127 billion.4 From SOFR’s launch in April 2018 through mid-October, only seven floating-rate bonds were issued with SOFR as a reference rate. What a difference one year makes.Additionally, the Treasury is considering floating-rate issuance that is benchmarked to SOFR, as well. If the Treasury were to regularly issue bonds tied to SOFR, it likely would further aid in the adoption and liquidity of markets linked to it.3. Coupon-rate averaging. If you’ve been following SOFR since it was launched in 2018, you’ll notice that it’s a bit more volatile than three-month LIBOR. It tends to experience swings at quarter-end as large institutions seek funding to clean up their balance sheets. And SOFR recently spiked due to concerns about a sudden cash shortage in the market for repurchase (repo) agreements, which are very short-term loans banks make to each other (the Fed relieved pressure by adding temporary funding to the system in late September).SOFR surged at the end of September due to short-term funding concernsSource: Bloomberg, using daily data as of September 30, 2019. United States SOFR Secured Overnight Financing Rate (SOFRRATE Index) and ICE LIBOR USD 3 Month (US0003M Index).Those swings pose a risk to lenders and borrowers alike, as sharp changes could weigh on funding costs if the coupon rates were based on point-in-time SOFR rates. However, it has been suggested that financial products should use, either implicitly or explicitly, some sort of average SOFR reading, not a single day’s reading. According to the Federal Reserve Bank of New York, “an average of SOFR will accurately reflect movements in interest rates over a given period of time and smooth out any idiosyncratic, day-to-day fluctuations in market rates.”4. Standardized fallback language. The ARRC has been working to address risks in products still tied to LIBOR in the event LIBOR is no longer usable. They have provided recommendations on a number of products, including adjustable-rate mortgages, floating-rate notes and other securitizations. The language may vary, both in length and in the actual language used. Generally, the “consultations proposed that following a trigger event the product would pay interest at a SOFR-based rate, with an adjustment so that the successor rate would be more comparable to LIBOR.”55. Term rates coming? As noted above, SOFR is an overnight rate, while LIBOR has multiple terms—from as short as overnight to as long as 12 months. To gain more acceptance within the financial markets, some sort of SOFR term structure—like a 30-day or 90-day SOFR, for example—would likely be needed.According to the Securities Industry and Financial Markets Association, the growth of SOFR futures and swaps markets will be important to the development of a SOFR term structure. The Chicago Mercantile Exchange is planning to launch options on three-month SOFR on January 6, 2020, and the ARRC is aiming to have a SOFR term structure by the end of 2021.66. 0% floor likely. While we don’t anticipate below-zero rates coming to the U.S. anytime soon, we can’t ignore the negative interest rate policies abroad. The ARRC has recommended a floor of 0% for coupon rates. In other words, if SOFR were to dip below zero, floating-rate coupons referenced to SOFR would likely be floored at 0%.7What to do nowWhile we do see some risks with the ongoing implementation of SOFR, we view the recent new issuance linked to SOFR and the plethora of updated guidance and recommendations from the ARRC as positive developments.For investors who hold individual floating-rate notes, the impact may depend on the notes’ reference rate, and whether there is stated fallback language for when LIBOR is no longer available. We still see risk for legacy floaters tied to LIBOR without explicit language as to what happens once LIBOR goes away, as there could be increased price volatility as liquidity decreases.For exchange-traded fund (ETF) and mutual fund investors, it will be up to the funds’ managers to do their own due diligence on the underlying holdings. On the bright side, we have colleagues at Schwab who are looking into the LIBOR retirement and how various mutual funds and ETFs are navigating the transition.1 Source: SEC, “Staff Statement on LIBOR Transition,” July 12, 20192 Source: John Williams, speech: “LIBOR: The Clock is Ticking,” September 23, 20193 Source: Andrew Bailey, speech: “LIBOR: Preparing for the End,” July 15, 2019.4 Source: Schwab Center for Financial Research with data from Bloomberg. Search criteria included all investment-grade, US-dollar denominated debt with floating coupon rates, issued from April 2, 2018 through September 30, 2019.5 Source: Alternative Reference Rate Committee, “ARRC Recommendations Regarding More Robust Fallback Language for New Issuances od LIBOR Floating-Rate Notes,” April 25, 2019.6 Source: Securities Industry and Financial Markets Association, “SIFMA Insights: Secured Overnight Financing Rate (SOFR) Primer,” July 20197 Source: Alternative Reference Rate Committee, “SOFR Floating Rate Notes Convention Matrix,” August 2019.