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Why I Finally Moved My Business From Vanguard to Charles Schwab
It’s a slippery slope when a customer-driven operation like Vanguard Group, since it was founded almost 50 years ago, starts to get greedy by imposing a bunch of extravagant changes and fees on its customers.
What’s more, being greedy can not only harm your company’s reputation but also cost you money. That’s what will happen in my case, because I decided to vote with my feet – in the metaphorical sense, of course – and transfer my Vanguard Individual 401(k) account to Charles Schwab (SCHW).
If you’re one of the millions of Vanguard customers affected by the tacky changes I discussed last month, you might consider doing something similar if you are in a situation like mine.
In my case, there is no income tax generated by switching from Vanguard to Schwab because it is a retirement account. If you’re considering moving or liquidating a taxable account to escape Vanguard’s changes, consider the tax consequences (if any).
I’m withdrawing my Individual 401(k) from Vanguard now because next month it will be selling many of its small business retirement accounts, including mine, to a company called Ascensus, LLC. I have nothing against Ascensus. However, Ascensus would charge me fees of at least $40 per year, and possibly more. I didn’t pay any annual fees to Vanguard for my Individual K account, which I opened in 2016 and primarily funds with my earnings from writing articles.
Since my goal is to get the best deal for myself, I don’t want to pay even a relatively small double-digit annual fee to Ascensus if I don’t have to. Turns out I don’t.
Vanguard: “I hope this is a one-time behavior.” (Pavlo Gonchar/SOPA Images/LightRocket via Getty Images) (SOPA Images via Getty Images)
When I first wrote about Vanguard’s changes, I wasn’t sure if I would transfer my account. But now, after doing a little homework, I’ve decided to move it because Schwab, which is a for-profit shareholder-owned operation, is offering me a better deal than I would get if I had Vanguard, a owned by your investors, sell my account to Ascensus.
Vanguard’s ownership structure, which has led the company to continue reducing fees on its funds, is one of the main reasons I have, thus far, switched accounts to Vanguard but never switched an account.
In a statement, Ascensus said: “We charge a flat fee for our services, which allows us to offer streamlined digital experiences with small business needs, market insights and educational resources in mind.” However, since I make my own investment choices and my Individual 401(k) only has one stock, I don’t see a need to pay Ascensus anything.
My move to Schwab means that Vanguard, who declined to comment, will not get what they expected from selling my account to Ascensus. And I may very well end up swapping my entire Vanguard Individual K stock market index fund – its entire holding – for Schwab’s equivalent fund.
The story continues
Why? Because I discovered, to my surprise, that Schwab charges a management fee of just 0.03% for its total market index fund, compared to the 0.04% that Vanguard charges Admiral class shareholders like me for your total market index fund.
Therefore, not only will Vanguard receive nothing from the sale of my account to Ascensus, they will likely lose the management fee they currently receive from my Individual K.
Until now, it never occurred to me to check whether Schwab’s total market fund had lower costs than Vanguard’s. If Vanguard hadn’t announced plans to sell its individual 401(k)s, SIMPLE IRAs, and multi-participant SEP-IRAs to Ascensus, I wouldn’t have bothered to look for a rate lower than the tiny 0.04%.
A local Schwabbie showed me that I could transfer my Vanguard account to Schwab at no cost. And that, if I wanted, I could keep my existing shares of the Vanguard index fund in my new account, which I’m opening. (Another plus: His office is just a 10-minute walk from my house.)
To show you that I’m frugal but not crazy, I plan to leave my wife’s account and my six other Vanguard accounts in place.
Cheaper rates? A Charles Schwab office in San Francisco. (Photo by Smith Collection/Gado/Getty Images) (Smith Collection/Gado via Getty Images)
This is despite the fact that one of the annoying changes Vanguard is making involves a new 1% tax on dividends received by its clients who, like me, hold foreign securities and American Depositary Receipts.
However, the fee will cost me less than $4 per year and it’s not worth running my account for that trivial amount. Furthermore, unlike my Individual K, my shareholding in Switzerland may not end up being permanent.
I have no idea how many Vanguard customers are withdrawing accounts from Vanguard because of the tacky changes the company is making or how much in assets and annual management fees Vanguard will lose. But I’m clearly not alone.
I also have no illusions that my move to Schwab will bring Vanguard to its knees. But I hope this is a one-time behavior and that the company doesn’t do something else in the future that would induce me to make another choice like the one I just made.
Yahoo Finance contributor Allan Sloan has won the Loeb Award seven times, the highest honor in business journalism.
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