Since the 401(k) retirement plan was introduced in the early 80’s, it has remained the preferred and most trusted retirement savings plan for millions of US workers. After all, the 401(k) plan is a savings vehicle designed to provide income for workers in golden years.
Due to its crucial role in retirement planning, any savvy financial advisor should seek and recommend only the 401(k) providers that can give the best value to their plan holders. One of the many potential 401(k) providers that we will review is Vanguard.
In this article, InvestmentNews delves into the questions your clients may have regarding the 401(k) Vanguard plan for individuals and the Vanguard 401(k) for small business. So, let’s begin.
The Vanguard Group, Inc., or simply Vanguard, is a registered investment advisor (RIA) that was famously established by John C. “Jack” Bogle, more commonly known as “the father of the mutual fund”. Bogle was also renowned for being one of the founders of Berkshire Hathaway with his longtime friend, Warren Buffett.
Right after graduating from Princeton University in 1951, Vanguard’s founder Jack Bogle joined the Wellington Management Company. Over a decade after, he presided over a merger between the company and a fund manager in Boston. The merger did not go well, resulting in Bogle's firing.
Luckily, he was re-hired and sometime in the 1970s was allowed to put up a new fund division at Wellington which Bogle named Vanguard. After getting approval from Wellington’s board of directors, Bogle established the First Index Investment Trust, which is now known as the Vanguard 500 Index Fund.
This was one of the earliest index funds that practiced passive investing, which raised $11 million in its IPO, increasing to $17 million in AUM within a year.
Over the years, Bogle would go on to slowly introduce more index funds, including:
By introducing these different funds, Vanguard became the largest mutual fund company in the world.
Bogle started the Vanguard Group in 1975 with some $1.4 billion in net assets.
When he stepped down as Chairman and CEO in 1996, Vanguard had amassed $180 billion in AUM. And by the time he died in 2019, the funds grew to nearly $5 trillion in AUM.
John C. Bogle was the founder of Vanguard and is credited with creating the first index fund
His quotes are timeless masterpieces
These are 10 of his best quotes: pic.twitter.com/VqaFDBXwAB
— Dividend Hero (@HeroDividend) January 18, 2024
Bogle left a legacy of financial expertise and success. He also wrote books on investing that many experienced advisors still use and swear by.
Today, Vanguard is the largest provider of mutual funds and the second-largest provider of exchange-traded funds (ETFs) in the world, second only to BlackRock's iShares. Vanguard’s menu of services include:
Vanguard continues to offer innovative products; its fractional share program for its ETFs (exchange-traded funds) is one example. Introduced in February of 2021, Vanguard’s fractional share offerings give new investors the opportunity to invest for as little as a dollar.
Vanguard differs from many other 401(k) providers in that it’s an online brokerage. Vanguard does not maintain any physical offices where plan holders can meet face-to-face with an advisor. Instead, clients must register an online account with Vanguard, using their portal to manage their investments. This is great for Vanguard clients, since this keeps their costs incredibly low.
Vanguard is not a privately owned or publicly traded company – in reality, it’s owned by the investors. That said, here are some of Vanguard’s key features and benefits:
Investors can choose from over 100 different Vanguard mutual funds. Of these 100, 38 are index funds with Admiral Shares, a share class unique to Vanguard. Admiral Shares are distinct, as they have a lower average expense ratio in the range of 0.04 to 0.45%, with a small average of 0.11%.
Because Vanguard counts educational account services as part of its offerings, Vanguard’s multiple tools are helpful to investors in researching funds before putting money into them. Here's what makes Vanguard’s research tools so effective:
Those who sign up for a 401(k) with Vanguard can download the Individual 401(k) Employer Kit from their website. The kit provides all the instructions and all the necessary forms for setting up an account.
New plan holders also get a plan adoption agreement and basic plan document. If an investor has any questions or needs help filling out the forms, their customer service hotline can assist.
Most notably, the entire process of setting up an individual 401(k) account in Vanguard takes only an average of seven to 10 business days.
Investors who need guidance on their investments can call the company and consult a representative in most cases. However, this feature isn’t available to Vanguard’s personal advisory services.
Accounts that have $250,000 or more in assets are required to submit Form 5500 to the IRS. Vanguard provides 401(k) plan holders with the necessary information to complete this form.
Vanguard has a distinct service when it comes to their 401(k) withdrawals or distributions. Vanguard assists investors with a Required Minimum Distribution (RMD) Service that calculates plan holders' RMDs.
Vanguard will then automatically deposit the money into a bank of the plan holder’s choice or transfer it to another non-retirement investment account. The best part of these services is that they’re provided for free.
Investors can use Vanguard’s app to do many of the tasks for managing their account. They can:
What makes the Vanguard app stand out is not only is it iOS and Android compatible, but it also works on Kindle devices. Once an account is open for at least 60 days, plan holders can also use the app with the camera on their phone or tablet for making mobile check investments.
There are many good features in 401(k) with Vanguard. But as with any retirement plan or investment, it is not without its imperfections. Here’s what advisors and investors should know:
Investors with old 401(k) accounts from previous employers cannot roll the money over into a 401(k) Vanguard account. Plan holders must instead take their funds from other 401(k)s and do a rollover into an IRA, whether a traditional IRA or Roth IRA. Vanguard representatives will assist investors in setting up a Vanguard IRA and transferring their assets.
If investors wonder about the 401(k) Vanguard loan, they may be surprised to discover that there isn’t one. Vanguard is probably one of the few 401(k) providers that, apart from 401(k) rollovers, does not allow loans on their 401(k) plans either.
Some advisors may view this as a benefit, since borrowing money from a 401(k), even if the plan holder repays the loan, is not something they’d recommend. A better option would be to withdraw some money from the 401(k) and repay the amount later – and there are strategies to minimize the impact of these 401(k) early withdrawals.
The fact that Vanguard doesn’t have any physical offices can be both a benefit and a drawback.
The upside: less costs for Vanguard, no costs to pass on to clients.
The downside is that clients who want face-to-face meetings with advisors or customer service representatives cannot do so. And since there are no offices, this does away with the need for human advisors for most financial management tasks. Vanguard uses robo advisors to put together their clients’ portfolios.
While investors can open an individual 401(k) Vanguard account with no minimum amount, there is a minimum investment of $1000 for the mutual funds that go into the account. These can be relatively high, considering that there are some mutual funds that have no minimum requirement.
This is a 401(k) Vanguard plan for small businesses. The VRPA program provides professional financial management services, and a host of other services including:
Plan participants can have their pick from as many as 12,000 non-Vanguard funds, company stock, and other investments. They can buy and sell these investments through their self-managed brokerage accounts.
However, plan participants may not have that many investments to choose from, since the employers will narrow down the options to a more manageable number. Ideally, the employers’ choice of investments should suit plan holders’ risk tolerance, years until retirement (time horizon), age, and other factors.
As with most other 401(k) plans on the market, the Vanguard Retirement Plan Access Program offers the employer match feature. This is one of the benefits of 401(k) plans, as this can be a means for companies to attract and retain top talent.
Are employers making the most of their 401(k) match? New research from Vanguard, in partnership with Yale University and Massachusetts Institute of Technology, outlines criteria employers can use to optimize their match formula. https://t.co/qY0vrud9NW#VanguardInsights
— Vanguard (@Vanguard_Group) June 10, 2024
Those familiar with the employer match know that employers can choose to make contributions to match those of their employees. For example, employers can give half of every dollar their employees contribute, increasing their retirement fund.
As for contributions, employees may contribute a maximum amount every year. This amount is set by the IRS. For 2024, employees may contribute up to $23,000 for workers under 50. Workers aged 50 and up can make an additional catch-up contribution of $7,500 for a maximum of $30,500.
Another appealing feature of the 401(k) is the tax advantages it offers. It’s one of several reasons why the 401(k) is still considered the best investment for employees. The 401(k) with Vanguard has the same tax benefits as other plans from other institutions.
Vanguard offers both types of plans, the traditional and Roth 401(k). As a refresher, here’s a chart showing how taxes are applied on each type:
| Differences between a traditional 401(k) and Roth 401(k) | ||
| Traditional 401(k) | Roth 401(k) | |
| Taxes on contributions | Tax-deferred until withdrawal; contributions reduce gross taxable income during employee’s productive years | Contributions are taxed, but withdrawals are tax-free |
| Taxes on distributions | Money withdrawn in retirement is taxed as regular income | No taxes on distributions or earnings when taking qualified distributions (as long as the 5-year rule is met) |
| Employer matches | Matching funds are pre-tax | Matching funds for a Roth 401(k) go into a traditional 401(k) and are pre-tax |
| Withdrawal Rules | Vanguard 401(k) withdrawals get 10% early withdrawal penalty, plus taxes if made before age 59½ | 10% early withdrawal penalty, taxes applied if made before 59½, must meet the 5-year rule |
Advisors should take heed of recent news regarding Vanguard’s 401(k) plans – Ascensus recently purchased three of Vanguard Group’s retirement plans for small businesses:
Once the deal is completed in Q3 of 2024, Ascensus will take the reins and provide these plans’ services, which include:
These plans will still have access to Vanguard funds.
Vanguard will continue to offer one-person SEP IRAs for small business owners/solo entrepreneurs. The deal doesn’t include other retirement solutions provided by Vanguard.
Here's a video discussing the implications of Ascensus’ purchase of Vanguard’s 401(k)s. Depending on the investor, they will have to weigh their options. Should they keep their Vanguard 401(k) as it is absorbed by Ascensus? Or should they move to other providers like Fidelity or Schwab?
Did you know that Vanguard is on our list of 5-star fund providers for 2024? It was the only firm recognized across all categories, coming in first in breadth of investment options and second in transparency and reputation.
Knowing that the Vanguard 401(k) will soon be handed over to another company, the biggest question is, is it still worth maintaining?
If your clients have 401(k)s with Vanguard, they should have no problems even after their plans have migrated to Ascensus. Vanguard has promised to allow their former 401(k) plan holders’ access to Vanguard funds, and the new company will not risk their reputation by downgrading their services.
If Vanguard still accepts new clients for these 401(k) accounts, it's possible these clients will be referred to Ascensus customer service for their inquiries or advised to wait for the transition before applying.
Vanguard has had a stellar reputation overall for its 401(k) plans and the attached services. Staying with Vanguard 401(k) or choosing other providers may make little difference in the long term. Investors can also choose to keep their money with Vanguard via a Vanguard IRA rollover. Ultimately, the decision to stay or move away from the Vanguard 401(k) depends on the individual investor’s preferences, risk appetite, and other factors.
To help clients get the best outcomes, financial advisors need to stay up to date on industry news and use the best financial tools. Check out our list of best investment research platforms for 2024. Read the report now.
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