Charles Schwab Corp. is buying a 401(k) manager from insurer Nationwide Financial Services for $115 million, feeding the San Francisco discount broker’s appetite for a larger slice of revenue from corporate retirement plans.
The all-cash deal announced Friday may herald the first in a series of Schwab acquisitions as the company explores ways to reinvest a projected $2.5 billion windfall from a pending sale of U.S. Trust, a wealth-management specialist that will be handed off to Bank of America in the spring.
Charles Schwab, chief executive of the brokerage he founded, told analysts earlier this month that the company may use its extra cash to expand, and mentioned the steadily growing 401(k) field as a particularly promising opportunity.
Other 401(k) acquisitions remain a possibility, James McCool, executive vice president of Schwab’s corporate and retirement services division, said in an interview Friday.
Schwab has been providing record-keeping and other administrative services for 401(k) plans for the past decade, but most of the activity has been concentrated among small and mid-size employers.
Buying the 401(k) Co. from Nationwide will give Schwab more of the tools to pursue contracts with large employers that have defined-contribution retirement plans with more than $500 million in assets – a market segment traditionally dominated by large mutual fund companies like Fidelity and Vanguard.
But the 401(k) Co. has been making significant inroads in recent years and now handles at least two plans with more than $1 billion in assets. Through September, the company handled the 401(k) plans of about 100 companies with $21.7 billion in assets and 400,000 participants.
Nationwide, which bought 401(k) in 1998, decided to sell the subsidiary to concentrate on serving smaller employers, said Mark Thresher, the Austin company’s chief operating officer.
The deal helped lift Nationwide shares by 22 cents to close at $53.84 on the New York Stock Exchange while Schwab shares fell 17 cents to finish at $18.95 on the Nasdaq Stock Market.
Schwab’s stock price has climbed by nearly 30 percent so far this year, propelled by the most profitable year in the company’s 31-year history.
Management believes it can build upon its recent momentum by diversifying into financial services like 401(k) management that provide a more reliable stream of revenue than stock trading commissions, which can fluctuate with investor sentiment.
Some of Schwab’s more recent efforts to diversify through acquisitions haven’t panned out. U.S. Trust, bought six years ago, never really jelled with Schwab’s discount brokerage while a $345 million acquisition of a stock research firm in 2003 saddled the company with a substantial loss.