In the fee-laden world of money management, the Vanguard Group has long enjoyed a reputation of shooting straight.
When Jack Bogle founded Vanguard almost 50 years ago, the idea was to create a company owned by its investors — aligning the company’s and customers’ incentives. That unique model, unlike shareholder-owned outfits like Schwab and Fidelity, pushed Vanguard to constantly look for ways to reduce fees, leading to minimal fee index funds, low fees for actively managed funds, and a general lack of chintzy or hidden fees.
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Warren Buffett wrote in his 2016 letter to shareholders of Berkshire Hathaway. “He helped millions of investors realize far better returns on their savings than they otherwise would have earned … he is a hero to them and to me.”
But the company, founded in May of 1975, may be attempting to trade some of its hard-earned goodwill for the most banal of asset management vices: chintzy fees, including one that a longtime Vanguard observer calls “nickel-and-diming Grandma.” These are developments that, when considered next to Jack Bogle’s legacy, feel unusual and unBogle-like.
Let me take you through some of these changes, which will affect millions of customers, explain what’s going on, and give you Vanguard’s side of things.
Selling retirement accounts
First off, Vanguard has decided to sell many (it won’t say how many) small-business retirement accounts, including one of mine, to a firm called Ascensus. This company will impose fees on investors like mewho currently pay no fees to Vanguard. The accounts Vanguard is selling include individual 401(k)s, SIMPLE IRAs, and multiparticipant SEP-IRAs.
Vanguard said itsawthat 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 having an individual 401(k) for which I pay no fees to a firm that will charge me at least $40 a year in fees, and possibly more.
Vanguard group founder John Bogle makes a point during an interview at his office on the Vanguard campus, near Valley Forge, Penn., Jan. 16, 2003. Bogle, an industry guru, has publicly criticized the investment fund industry. (Reuters) ·Reuters
Interestingly, Vanguard isn’t selling its individual IRA business to Ascensus. Vanguard says that’s because it has lots of individual IRAs and thus benefits from economies of scale. Whereas selling the relatively few individual 401(k)s that it handles, Vanguard says, will keep costs down for the customers that it retains.
So why aren’t I converting my individual 401(k) to an individual IRA and suggesting that other affected Vanguard investors do the same? Because contributions to an individual 401(k) are generallydeductible for local income tax purposes,butin somestates — including mine — contributions to individual IRAs aren’t deductible.
This means that if individual 401(k) holders stay at Ascensus — I’m not sure what I’ll do — they’ll be hit with costs they had no way to anticipate when they opened and kept their accounts at Vanguard.
A tax on the elderly?
Then there’s the $25 fee that Vanguard will impose on people who own less than $1 million of Vanguard funds and buy or sell Vanguard funds by calling Vanguard phone reps rather than trading online.
“It seems like the only people paying that $25 fee will be retirees who have been lifelong Vanguard investors but aren’t comfortable with the internet,” says Jeff DeMaso, whose Independent Vanguard Adviser newsletter isn’t part of the Vanguard empire. That’s why DeMaso calls this fee “nickel-and-diming Grandma,” which strikes me as being accurate, funny, and sad.
Vanguard says that the vast majority of trades in its funds are done online and that charging a fee to some people who trade by phone will lower costs for everyone else.
This may be the co-op mindset, but it feels like a tyranny of the majority. Considering that at least some people who’ve had Vanguard accounts for years aren’t set up to trade electronically, this charge just feels wrong.
As does the fact that Vanguard is willing to absorb the costs of people who own at least $1 million of Vanguard funds who trade by phone but not the costs of people who own less than $1 million.
A new dividend fee
Then there’s another cheesy charge: a new 1% fee on dividends received by Vanguard customers who hold foreign securities and American Depositary Receipts. This charge will cost me only about $4 a year and will be indirectly tax-deductible by reducing my taxable dividend income, but it still strikes me as tacky.
Vanguard said, “The fee helps to offset the operational costs associated with foreign securities and ADRs.” But it won’t provide any numbers about those costs or how many people the fee will impact.
The $100 kick 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 of Vanguard funds and transfer accounts to other brokerage houses. Vanguard says that the fee “helps to offset the costs of the asset transfer.” It’s another example of imposing costs on smaller investors but not on larger ones. It doesn’t feel right.
To be sure, Vanguard’s competitive situation has changed in the 49 years since Bogle launched the company. Back then, Wall Street mocked retail index funds. Now, index funds have become a huge segment of the market and some competitors are charging minuscule fees that are competitive with Vanguard’s.
Obviously, Vanguard has to change with the times — but the changes I’ve discussed here feel incongruous with the company’s legacy.
I can’t ask Bogle, who died in 2019, what he thinks about what’s going on at the company he founded. But for a firm that says its mission is “to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success,” these new charges sure seem unseemly.
Allan Sloan is an award-winning financial journalist and contributor to Yahoo Finance.
