Schwab Buys 401K Firm To Pursue Bigger Companies' Plans

by Judy Warner, Dec 26, 2006, 5:00 AM

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Charles Schwab Corp.'s decision to buy The 401(k) Co. from Nationwide Financial Services, Inc. for $115 million in cash will allow it to expand its retirement business into larger companies. In turn, Nationwide said the sale would enable its "private sector business to focus on our core markets, which are small and micro 401(k) plans."

Buying The 401(k) Co. will allow Schwab to pursue pension administration contracts with more than $500 million in assets from large employers, a market segment now dominated by Fidelity Investments and Vanguard.

"Many Americans are depending on their 401(k) accounts to help them achieve a comfortable retirement--it's one of the pillars of our retirement security system," said chairman and CEO Charles R. Schwab in a statement issued on Friday.

"The 401(k) Company has dedicated itself to providing retirement plan sponsors and employees with absolute quality and low-cost products and services, driven by a strong sense of entrepreneurial spirit and integrity," said Schwab. "Like Schwab, it has recognized the importance of open investment architecture, fee transparency and client focus. I feel certain that the combination of our two companies will allow us to have an even greater impact on the 401(k) industry and the savings habits of retirement plan participants."

The 401(k) Co. offers defined contribution pension plan administration to more than 100 companies with about 400,000 participants. The Austin, Texas-based company has $21.7 billion under assets, and will be folded into Schwab's Corporate & Retirement Services division.

The transaction comes on the heels of the sale of U.S. Trust, which Schwab itself bought six years ago, to Bank of America for $3.3 billion in cash. Schwab expects a pre-tax gain of $1.9 billion and to collect $2.5 billion after taxes from the transaction, which should close by the end of the 1st quarter.

Schwab stock in the last year has risen 30%, giving the 31-year-old company its most profitable year ever. During an analysts' briefing earlier this month, Schwab CFO Chris Dodds said the San Francisco-based company's earnings could hit $1 billion this year, or almost $100 million more than the firm's plan.

Other 401(k) acquisitions remain a possibility, said James McCool, EVP of Schwab's corporate and retirement services division, in interviews with reporters late last week.

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