In the fee-laden world of money management, Vanguard Group has long had a reputation for being straight-shooting.
When Jack Bogle founded Vanguard nearly 50 years ago, the idea was to create a company owned by its investors – aligning the incentives of the company and those of customers.. That unique model pushed Vanguard, unlike shareholder firms like Schwab and Fidelity, to continually look for ways to lower fees, leading to index funds with minimal fees, low fees for actively managed funds, and a general lack of chintzy or hidden reimbursements.
“If ever a statue is erected in honor of the person who did the most for American investors, Jack Bogle should be the absolute choice,” Warren Buffett wrote in his 2016 letter to Berkshire Hathaway shareholders. “He has helped millions of investors realize far better returns on their savings than they would otherwise have earned. 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: expensive fees, including one that a longtime Vanguard observer called “nickel-and-diming.” grandma’. ” These are developments that, when viewed alongside Jack Bogle’s legacy, feel unusual and un-Bogle-like.
Let me show you some of these changes that will impact millions of customers, explain what’s going on, and show you Vanguard’s side.
Selling retirement accounts
First, Vanguard has decided to sell many (don’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 currently pay no fees to Vanguard. The accounts Vanguard sells include individual 401(k)s, SIMPLE IRAs and SEP-IRAs with multiple participants.
Vanguard said so saw that the “needs of many small business owners have evolved” as it evaluated its offerings, and it calls Ascensus “a leading provider of tax-advantaged savings and retirement solutions deeply committed to serving the unique needs of small business retirement plans .”
But from where I sit – and I’m sure I’m not alone – I’m going from an individual 401(k) for which I pay no fees to a company that charges 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 thus benefits from economies of scale. While selling the relatively few individual 401(k)s it manages will, according to Vanguard, keep costs down for the customers the company retains.
So why not convert my individual 401(k) to an individual IRA and suggest that other affected Vanguard investors do the same? Because contributions to an individual’s 401(k) are generally deductible for local income tax, But in certain 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’ll do – they will face costs they could not have anticipated when they opened and maintained their accounts with Vanguard.
A tax on the elderly?
Then there’s the $25 fee that Vanguard will impose on people who own less than $1 million in Vanguard funds and buy or sell Vanguard funds by calling Vanguard’s phone representatives instead of trading online.
“It seems like the only people paying that $25 fee are going to be retirees who have been Vanguard investors all their lives but don’t feel comfortable with the Internet,” says Jeff DeMaso, whose newsletter for Vanguard independents advisors is not part of the Vanguard empire. That’s why DeMaso calls this compensation “nickel-and-diming grandma,” which seems accurate, funny, and sad to me.
Vanguard says the vast majority of trades in its funds take place online and that charging a fee to some people who trade over the phone will reduce costs for everyone else.
This may be the cooperative mentality, but it feels like a tyranny of the majority. Considering that at least some people who have had Vanguard accounts for years aren’t set up to trade electronically, this charge just feels wrong.
As is the fact that Vanguard is willing to absorb the fees of people who own at least $1 million in Vanguard funds who trade over the phone, but not the fees of people who own less than $1 million.
A new dividend payment
Then there’s a cheap surcharge: a new 1% fee on dividends received by Vanguard customers who hold foreign securities and American Depositary Receipts. This levy will only cost me about $4 per year and will be tax deductible indirectly by reducing my taxable dividend income, but it still seems tacky to me.
Vanguard said: “The fee will help offset operating costs associated with foreign securities and ADRs.” But it doesn’t provide figures on those costs or how many people the reimbursement will affect.
The $100 rush on the way out
Finally, there’s the new $100 fee that Vanguard may or may not charge people who own less than $5 million in Vanguard funds and transfer accounts to other brokerage firms. Vanguard says the fee “helps offset the costs of the asset transfer.” It’s another example of imposing costs on smaller investors, but not on larger ones. It does not feel right.
It’s fair to say that Vanguard’s competitive landscape has changed in the 49 years since Bogle founded the company. At the time, Wall Street mocked retail index funds. Now, index funds have become a huge segment of the market, and some competitors charge minuscule fees that are competitive with Vanguard.
It’s clear that Vanguard needs to change with the times, but the changes I’ve discussed here don’t seem in keeping with the company’s legacy.
I can’t ask Bogle, who died in 2019, what he thinks about the state of affairs at the company he founded. But for a company that says its mission is “to take a stand for all investors, treat them fairly, and give them the best opportunity for investment success,” these new allegations certainly seem inappropriate.
Allan Sloan is an award-winning financial journalist and contributor to Yahoo Finance.
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