by Dan Wiener | March 10, 2008 8:37 am
Vanguard is supposed to be a “no-load” shop, but in fact it charges a number of different “fees”—it doesn’t call them “loads”—for many of its funds.
Vanguard charges $10 fees for a variety of reasons. If your fund balance is below $2,500, you’ll get hit with a fee (this fee does not apply to IRAs or other Vanguard retirement accounts). If your UTMA, UGMA or STAR account falls below $500, the fee applies. If your Education Savings Account has a balance of less than $5,000, you’ll also pay a $10 fee.
And there’s a $25 per fund charge for SIMPLE IRAs if your total Vanguard assets are under $100,000.
Plus, Vanguard’s index funds charge a $10 annual fee for “account maintenance” for accounts with less than $10,000 in them.
You can avoid many of these fees in their entirety by investing more than $50,000 ($100,000 for the SIMPLE IRA fee) with the Vanguard Group.
Now some people would argue that $10 doesn’t really add up to much in the investment world. But I would like to differ. Vanguard is misrepresenting its real expenses with these fees.
Consider the impact of a $10 fee on the true expense ratio of a Vanguard fund with a stated expense ratio of just 20 basis points, or 0.20%. On a minimum $3,000 investment, the 20-basis point expense ratio is $6. Add another $10 to that, and the $16 you are paying becomes a total expense to you of 0.53%, or 53 basis points. That’s nowhere near the industry’s absurdly high expense ratios, but it isn’t 0.20%, either. In fact, it’s DOUBLE.
And what about those loads—or “purchase fees”—that Vanguard charges? Let’s consider a fund with, for example, a 0.35% operating expense and a 0.50% front-end load on top of the $10 annual account maintenance fee.
Combine the two, and you’ll see that, on a minimum initial investment of $3,000 in a fund with a stated operating expense ratio of 0.35%, the 0.5% load plus the fee actually give the fund a 1.18% total operating expense.
Remove the $10 fee, which is what happens when you invest $10,000 or more, and the expense ratio still sits at 0.85%.
How does Vanguard justify calling this a “fee” rather than a load? First, since the money isn’t paid to a broker or salesperson, but into the fund, the money does not fit the technical definition of a load. Of course, it doesn’t pass the “duck” test. That’s my way of saying if it walks and talks like a duck, it’s a duck. Or, if it reduces your initial investment like a load, then it’s a load.
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You may never have a problem with a Vanguard account. But the longer your stay with Vanguard—or any investment company—and the more you do business with them, the greater the chances that eventually you’ll run into some difficulty that can only be solved by one-on-one interaction with a senior Vanguard manager.
Most times, Vanguard’s vice presidents can solve your problems. But there’s nothing more frustrating than thinking you’ve reached a resolution and finding that, well, the problem remains. In that case, take it right to the top. I suggest you drop Vanguard Chairman John Brennan a letter explaining what went wrong and how you’ve tried to get the problem resolved.
Don’t worry. You won’t be wasting Mr. Brennan’s time. He has plenty of help standing by waiting to solve shareholder problems.
To get fast and prompt attention, write to:
Chairman John Brennan
The Vanguard Group
P.O. Box 876
Valley Forge, PA 19482
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