Wednesday, June 12, 2024

Unhappy customer: Why I finally took my business from Vanguard to Charles Schwab

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It’s a slippery slope when a customer-oriented operation like Vanguard Group has been since it was founded almost 50 years ago begins to get greedy by imposing a whole bunch of changes and chintzy fees on its customers.

What’s more, getting greedy can not only damage the firm’s reputation but can also cost it money. That’s what will happen in my case, because I’ve decided to vote with my feet — in the metaphorical sense, of course — and move 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 that I discussed last month, you might want to consider doing something similar if you’re in a situation like mine.

In my case, there are no income taxes generated by changing to Schwab from Vanguard because it’s a retirement account. If you’re thinking of moving or liquidating a taxable account to escape Vanguard’s changes, make sure to take tax consequences (if any) into account.

I’m taking my Individual 401(k) away from Vanguard now because next month it’s 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 a year, and possibly more. I’ve paid no annual fees to Vanguard for my Individual K account, which I opened in 2016 and fund primarily with what I’m paid for writing articles.

Since my goal is to get the best deal for myself, I don’t want to pay even a relatively small two-digit annual fee to Ascensus if I don’t have to. Which it turns out that I don’t.

UKRAINE - 2021/12/30: In this photo illustration, the Vanguard Group Inc. logo is seen displayed on a smartphone screen and a stock market line graph is seen in the background. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

Vanguard: “I sure hope this is one-and-done 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 was going to transfer my account. But now, after doing a bit of homework, I’ve decided to transfer it because Schwab, which is a for-profit shareholder-owned operation, is offering me a better deal than I’d get by having Vanguard, a company owned by its investors, sell my account to Ascensus.

Vanguard’s ownership structure, which has led the firm to keep lowering fees on its funds, is a major reason why, until now, I’ve moved accounts into Vanguard but never moved an account out.

In a statement, Ascensus said, “We charge a flat fee for our services, which enables us to deliver streamlined digital experiences with the needs of small businesses in mind, market insights and educational resources.” However, since I make my own investment choices and my Individual 401(k) owns just one stock, I see no need for me to pay Ascensus anything.

My move to Schwab means that Vanguard, which wouldn’t comment, won’t get whatever it was counting on from selling my account to Ascensus. And I may well end up swapping my Individual K’s Vanguard total stock market index fund — its entire holding — for the equivalent Schwab fund.

Why? Because I discovered, to my surprise, that Schwab charges a management fee of only 0.03% for its total market index fund, compared with the 0.04% that Vanguard charges Admiral class shareholders like me for its total market index fund.

So not only will Vanguard not get anything from selling my account to Ascensus, it will probably lose the management fee that it currently gets from my Individual K.

It never occurred to me until now to see if Schwab’s total market fund had lower costs than Vanguard’s. Had Vanguard not 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 fee lower than the minuscule 0.04%.

A local Schwabbie showed me that I could transfer my Vanguard account to Schwab at no cost. And that if I wanted to, I could keep my existing Vanguard index fund shares in my new account, which I’m in the process of opening. (Another plus: Its office is just a 10 minute walk from my house.)

To show you that I’m thrifty but not insanely so, I plan to leave my wife’s and my six other Vanguard accounts in place.

Facade of Charles Schwab office with logo visible on a sunny day, Main Street, South of Market, San Francisco, California, June 7, 2024. (Photo by Smith Collection/Gado/Getty Images)Facade of Charles Schwab office with logo visible on a sunny day, Main Street, South of Market, San Francisco, California, June 7, 2024. (Photo by Smith Collection/Gado/Getty Images)

Cheaper fees? A Charles Schwab office in San Francisco. (Photo by Smith Collection/Gado/Getty Images) (Smith Collection/Gado via Getty Images)

That’s despite the fact that one of the annoying changes that Vanguard is making involves a new 1% fee on dividends received by its customers who, like me, hold foreign securities and American Depositary Receipts.

However, the fee will cost me less than $4 a year, and it’s not worth moving my account for that trivial amount. Besides, unlike my Individual K, my Swiss stockholding may turn out not to be permanent.

I’ve got no idea how many Vanguard customers are pulling accounts out of Vanguard because of the cheesy changes the firm is making or how much in assets and annual management fees Vanguard will lose. But I’m clearly not alone.

Nor am I under any illusion that my move to Schwab will bring Vanguard to its knees. But I sure hope this is a one-and-done behavior and that the company doesn’t do something else in the future that will induce me to have to make another choice like the one I’ve just made.

Allan Sloan is an award-winning financial journalist and contributor to Yahoo Finance.

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