Search: admiral-shares

Opening an Individual 401(k) at Vanguard

This article was written by Flexo in Investing. 17 comments.

Now that I’m not working for an employer other than myself, I no longer have the benefit of investing part of my salary in a company-managed 401(k), and I also no longer have the benefit of the employer-matched contribution. I’ll miss the 100% return on the first 4% of my pay. Before leaving my day job, I researched my options for replacing my employer’s 401(k), and after carefully considering my choices, I decided to open an Individual 401(k) to accompany my already-existing SEP IRA.

Benefits of an Individual 401(k)

There are two types of contributions that an Individual 401(k) — also called a Solo 401(k) — can take: employer’s contributions and employee’s contributions. There are slightly different rules for sole proprietors than there are for corporations. Since my business is a corporation, the maximum employee contribution is $16,500 or up to 100% of compensation, whichever amount is lower, just like a regular 401(k). This contribution, combined with the employer contribution, have a maximum of $49,000.

For tax purposes, the employee contributions are taken before they income is taxed and reduce the income of the employee, while the employer contributions are deducted from business income.

Choosing Vanguard

For me, choosing Vanguard for the Individual 401(k) made sense. Their low-cost Admiral shares will, if one believes the principle of investing in index funds and a buy-and-hold strategy, provide the best returns by the time I “retire.” There is an annual maintenance fee of $20 for the account per participant, but that fee is waived if you qualify for Vanguard’s Voyager Services. Once you have $50,000 at Vanguard across almost any type of account, you qualify for the eliminated fees with Voyager Services. In fact, if you have more than one employee, it only takes one employee to qualify for Voyager Services to fees to be eliminated for all participants.

Update: I signed up for Admiral shares in my Individual 401(k), but it turns out they are not available. Apparently, Vanguard does not want to offer Admiral shares in Individual 401(k) accounts because it would amount to unfairness between highly-paid employees and those who are not. Vanguard offers Admiral shares to encourage customers to move more money, but in situations where Vanguard is a an employer’s choice, rather than an individual’s choice, they want all employees to have a level playing field. (I would argue that they should offer the lower cost option to all employees if they want equity among various income levels.)

Although I chose Vanguard, many popular brokers offer Individual 401(k)s. Fidelity and T. Rowe Price are two low-cost options as well. My brick and mortar bank offered me the option when I visited the other day to talk about my business checking account, but I was not happy with their investment options and fees.

The opening process

Establishing a new Individual 401(k) is not as simple as applying for a savings account online, however. Visit the Small Business section of Vanguard’s website and locate the information on the Individual 401(k). There is a link to download the Individual 401(k) Kit for Employers. This is a PDF document that contains all the forms you need to establish a new Individual 401(k) for your business as well as accounts for any participants. The forms cannot be submitted online.

Here is what the kit includes:

Individual 401(k) Plan Adoption Agreement. This establishes the Individual 401(k) plan from the employer’s side.
Individual 401(k) Plan Authorization Form. This form informs Vanguard who will have access to make decisions about the 401(k) on the company’s behalf. Although Vanguard includes an attachment with this form as required by law, do not complete the Attachment A. If you complete the attachment and include it with your paperwork, Vanguard will not be able to establish or amend your plan as necessary.
Individual 401(k) New Account Form. I am my only employee, so I completed this form to establish the employee side of the Individual 401(k). If there were other employees, I could copy this form, have all employees provide their own information, and include the completed forms in the package.

When all forms are complete, just send the package back to Vanguard, to the address provided multiple times within the collection of forms. Not long after Vanguard receives the information, the brokerage will provide more information about how to contribute to your Individual 401(k). It took me longer than I wanted to get around to completing the forms, but it was much simpler than I imagined. You will be able to establish recurring contributions for the employer as well as the employees.

Accessing your Individual 401(k)

Vanguard has a separate website for small business customers. While I can view my Individual 401(k) using the normal user name and password I’ve had established for years, the Individual 401(k) requires me to establish a new user name and password for the small business side. All contributions, both employer and employee, will need to be established using this alternate user name. I don’t particularly like having two separate user names for the same brokerage.

After Vanguard processed my paperwork and established my account, I received an email to link my new participant account. Logging in was a frustrating process at first because I did not know that a new user name was necessary. The small business website rejected my user name, and I called customer service for help. The representative was able to explain the above to me, and I established my account. Furthermore, you cannot be logged into the individual investor side of Vanguard.com and later log into the small business side. You must clear your browser’s cookies in order for the login to work properly.

Contributing to the Individual 401(k)

Like many businesses, it will be difficult for me to predict what my business income will be for 2011, and will therefore prevent me from knowing exactly what my personal income will be. While it’s usually better to invest as much as possible at the beginning of the year, this unpredictability leads many businesses to contribute to these plans at the end of the year. I’ll be investing throughout the year, month by month, once I determine each month’s income.

{ 17 comments }

Convert to Vanguard Admiral Shares Now

This article was written by Flexo in Investing. 4 comments.

Last week, Vanguard decided to offer its lower-cost, more exclusive Admiral Class of fund shares to more investors. For most Vanguard index funds, any customer with a balance of at least $10,000 can convert their investment from the standard Investor shares to Admiral shares. Most managed funds require a $50,000 minimum to qualify. Previously, investors needed $100,000 in each fund, in each account, to qualify for Admiral class.

All qualifying investors should make this switch as soon as possible. My fund of choice, the Total Stock Market Index Fund, charges an expense ratio (annual fee based on total fund assets) of 0.07%. This is less than half the cost of the Investor Class funds of the same fund, at 0.18%. Both investments perform the same except for the difference in fees. There is no benefit to remaining invested in the standard Investor Class funds if the Admiral Class funds are available.

Vanguard will automatically convert your investments if you qualify, but you can speed the process by visiting your account on Vanguard’s website and selecting the link to do so. Vanguard warns converting customers that the stock price and performance of Admiral shares may not appear exactly the same on a day-to-day basis as Investor shares but should even out over the course of a few days.

If you manually convert your eligible funds rather than waiting for the automatic conversion, you will go through the process of converting one at a time.

I would prefer that Vanguard offer the lower-cost funds to investors with smaller balances. While I understand the desire to reward customers who invest more money with the discount brokerage, it would be a benefit better suited for those who may need to keep as much of their investment as possible. Additionally, if the funds can be offered at a lower price at all, the discount might as well be offered to everyone.

{ 4 comments }

Qualifying for Vanguard’s Voyager Services

This article was written by Flexo in Investing. 6 comments.

The more money you have, the more opportunities you have to save money.

That is Vanguard‘s message. I’m not sure I agree with the philosophy from a consumer standpoint, but it is a way to reward loyal customers — generally customers who make the most money for the company.

Yesterday I received a notification in the mail — whatever happened to the inexpensive and abundant tool called “e-mail,” anyway? — that I now qualify for Vanguard’s Voyager Services. While that sounds excellent, the benefits aren’t too impressive.

As a member of Voyager Services, investors will pay $7 for each stock or non-Vanguard ETF trade rather than $7 for only the first 25 trades and $20 after that. Investors who wish to buy a non-Vanguard no-load fund that carries a transaction fee, the fee will be only $20 rather than $35. Outgoing wires under $5,000 are free rather than $5.

Membership in Voyager Services is based on the amount of total household assets held at Vanguard, with $50,000 being the threshold. More benefits are available when an investor’s assets total $500,000 and yet another level of service is offered with $1,000,000 invested at Vanguard. These are called Voyager Select Services and Flagship Services respectively.

Voyager Services, Voyager Select Services, and Flagship Services shouldn’t be confused with owning Admiral Shares of a Vanguard mutual fund. Admiral Shares, with lowered expense fees, are where the real savings take place.

{ 6 comments }

Schwab Brokerage Lowers Expense Ratios, Beats Vanguard

This article was written by Flexo in Investing. 6 comments.

Here is some good news for investors. Schwab, competing for investment business with other low-cost mutual fund operations like Vanguard, Fidelity, and TIAA-Cref, has lowered the expenses on a number of their mutual funds.

The Schwab S&P 500 Index Fund (SWPIX), which competes directly with the Vanguard S&P 500 Index Funds (VFINX), now sports a net expense ratio of 0.09%, compared with Vanguard’s 0.16% (or 0.15% or 0.18%, depending on who you ask). Additionally, the minimum investment at Schwab is only $100. You will need $3,000 to open an account at Vanguard. Schwab’s Total Stock Market Index Fund (SWTSX) has also been reduced to 0.09%, which is lower than Vanguard’s expense ratio for the equivalent VTSMX of 0.16%.

Theoretically, the performance of an index fund “managed” by one company before fees should be identical to the returns provided by an equivalent fund “managed” elsewhere. With index funds, the fees matter because everything else is theoretically equal; lower expenses could save you many thousands of dollars over long stretches of time. With this news, I may consider at least investing new money with Schwab, and I will possibly consider moving some funds from Vanguard to Schwab.

I should point out that if you qualify for Vanguard’s Admiral Shares, your expense ratios will be lower than Schwab’s new rates. You need to have $100,000 in one mutual fund (or $50,000 in one fund and a ten-year history with that fund) to qualify.

{ 6 comments }