In the fee-laden world of money management, Vanguard Group has long enjoyed a reputation for being spot-on.
When Jack Bogle founded Vanguard almost 50 years ago, the idea was to create a company owned by its investors – aligning the incentives of the company and customers. This unique model, unlike shareholder-owned companies like Schwab and Fidelity, has led Vanguard to constantly look for ways to reduce fees, leading to rock-bottom-fee index funds, low fees for actively managed funds, and a general lack of fees. extravagant or hidden.
“If ever a statue is erected to honor the person who has done the most for American investors, the immediate choice should be Jack Bogle,” wrote Warren Buffett in his 2016 letter to Berkshire Hathaway shareholders. “He has helped millions of investors get much better returns on their savings than they otherwise would have gotten…he is a hero to them and to me.”
But the company, founded in May 1975, may be trying to trade some of its hard-earned goodwill for the most banal of asset management vices: extravagant fees, including one that a longtime Vanguard observer calls “granny cheap.” ”. These are developments that, when considered in conjunction with Jack Bogle’s legacy, seem unusual and un-Bogle-like.
Let me walk you through some of these changes, which will affect millions of customers, explain what’s happening, and present Vanguard’s vision.
Selling Retirement Accounts
First, Vanguard decided to sell many (I won’t say how many) small business retirement accounts, including one of mine, to a company called Ascensus. This company will impose fees on investors like me who do not currently pay fees to Vanguard. The accounts Vanguard is selling include individual 401(k)s, SIMPLE IRAs and multi-participant SEP-IRAs.
Vanguard said this mountain range that the “needs of many small business owners have evolved” as it evaluated its offerings, and calls Ascensus “a leading provider of tax-advantaged savings and retirement solutions, deeply committed to serving the unique needs of retirement plans of small businesses.”
But from where I sit — and I’m sure I’m not alone — I’m going to go from having an individual 401(k) that I pay no fees for to a company that will charge me at least $40 a year in fees, and possibly more.
Interestingly, Vanguard is not selling its individual IRA business to Ascensus. Vanguard says this is because it has many individual IRAs and therefore benefits from economies of scale. While selling the relatively few individual 401(k)s it manages, Vanguard says, will keep costs low for the clients it retains.
So why am I not converting my individual 401(k) to an individual IRA and suggesting that other affected Vanguard investors do the same? Because contributions to an individual’s 401(k) are generally deductible for local income tax purposes, but in some States – including mine – contributions to individual IRAs are not deductible.
This means that if individual 401(k) holders stay with Ascensus – I’m not sure what I will do – they will be hit with costs they had no way of predicting when they opened and maintained their Vanguard accounts.
A tax on the elderly?
Then there is the $25 fee that Vanguard will impose on people who have less than $1 million in Vanguard funds and buy or sell Vanguard funds by calling Vanguard telephone representatives rather than trading online.
“It appears that the only people who will pay this $25 fee will be retirees who have been lifelong Vanguard investors but are not comfortable with the Internet,” says Jeff DeMaso, whose Independent Vanguard Adviser newsletter does not part of the Vanguard empire. That’s why DeMaso calls this tax “grandma cheap,” which strikes me as accurate, funny, and sad.
Vanguard says the vast majority of trading in its funds is done online and that charging a fee to some people who trade by phone will reduce costs for everyone else.
This may be the cooperative mentality, but it feels like tyranny of the majority. Considering that at least some people who have had Vanguard accounts for years are not ready to trade electronically, this charge seems wrong.
Such as the fact that Vanguard is willing to absorb the costs of people who have at least $1 million of Vanguard funds who trade by phone, but not the costs of people who have less than $1 million.
A new dividend rate
Then there’s another tacky charge: a new 1% fee on dividends received by Vanguard customers who hold foreign securities and American Depositary Receipts. This fee will only cost me about $4 a year and will be indirectly tax deductible, reducing my taxable dividend income, but it still seems tacky to me.
Vanguard said: “The fee helps offset operating costs associated with foreign securities and ADRs.” But it won’t provide numbers on those costs or how many people the fee will affect.
The $100 Kick on Exit
Finally, there’s the new $100 fee that Vanguard may (or may not) charge people who hold less than $5 million in Vanguard funds and transfer accounts to other brokerages. Vanguard says the fee “helps offset the costs of transferring assets.” It is another example of imposing costs on small investors, but not on larger ones. It doesn’t feel right.
In fact, Vanguard’s competitive situation has changed in the 49 years since Bogle launched the company. Back then, Wall Street scoffed at retail index funds. Now, index funds have become a huge segment of the market and some competitors are charging tiny fees that are competitive with Vanguard’s.
Obviously, Vanguard has to change with the times – but the changes I’ve discussed here seem incongruous with the company’s legacy.
I can’t ask Bogle, who passed away in 2019, what he thought about what’s happening at the company he founded. But for a company that Say your mission is “taking a stand for all investors, treating them fairly and giving them the best opportunity for investment success”, these new accusations certainly seem inappropriate.
Allan Sloan is an award-winning financial journalist and contributor to Yahoo Finance.
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