indexfundfan @ indextown

Vanguard is known for its very low expense-ratio funds. However, since it is more costly to service accounts with low balances, Vanguard has chosen to impose some fees on accounts with low-balances.

The list of fees imposed by Vanguard is given HERE. The fees are generally $10 or $20 per fund. However, to many new investors, the fee structure is quite confusing. Below, I try to summarize these fees in the hope of making it easier to understand:

1. Low balance / custodial fee : $10 is charged annually if the value of a fund holding is less than $2,500 for a taxable account or less than $5000 for an IRA account (for IRAs, this is the custodial fee).
2. Index fund maintenance fee : all index funds, with the exception of the REIT index fund, are charged $10 every year if the fund holding is less than $10,000. This fee is taken out from the dividend distribution, and is paid either quarterly ($2.50 per quarter) or yearly, depending on the schedule of the fund’s dividend distribution.

The fees are accumulative, meaning you could be paying for both the fees at the same time for any given fund.

The following are fee waivers. You can combine household assets to meet the total asset thresholds but you might need to contact Vanguard to set it up.

1. $50,000 or more in total assets with Vanguard : you do not pay any low balance / custodial fee.
2. $250,000 or more in total assets with Vanguard : you do not pay any index fund maintenance fee if you are a Voyager client (more than $250,000 assets with Vanguard) or a Flagship client (more than $1,000,000 assets with Vanguard, of which $500,000 are in Vanguard funds).

Some common questions:

• Q1. My total stock market index fund holding is $7,000 in the taxable account and $4,000 in the IRA. Which fees are applicable?
• A1. First of all, these are considered as two separate fund holdings, so they cannot be combined to eliminate the index fund maintenance fee. Therefore, the fee is $10 in the taxable account for the index fund maintenance fee, and $20 in the IRA for the index fund maintenance fee and the low balance/custodial fee.

• Q2. Same scenario as above, but I have $50,000 in total assets with Vanguard.
• A2. In this case, the low balance / custodial fee is waived. So, you need to pay $10 in the taxable account for the index fund maintenance fee and another $10 in the IRA for the index fund maintenance fee.

• Q3. I have $3,000 in the REIT index fund in a taxable account. Do I pay any of the above two fees?
• A3. In this particular case, you do not pay any fees.

• Q4. How can I pay the custodial fee in the IRA?
• A4. The custodial fee can be pre-paid using taxable money or deducted from the holding in the IRA. In the traditional IRA, if you are not max’ing out on your contribution, I suggest letting Vanguard deduct directly from the IRA; but in the ROTH IRA, it is better to pre-pay using taxable money. The reason is that the money in the traditional IRA is “pre-tax” money (i.e. it actually costs you less than $10 “after-tax”); while that in the ROTH IRA is “after-tax” money, which you want to leave alone for tax-free growth.

• Q5. Isn’t it unfair that I have to pay these fees when my account balance is low?
• A5. Vanguard tries to charge each investor at cost for the expense it takes to service each account. Suppose if you hold $3,000 in the total stock market index fund. With the expense ratio at 0.19%, the total fees is $10 + $3,000 * 0.19% = $15.70 a year. On the other hand, someone with $30,000 in the fund would be paying more at $30,000 * 0.19% = $54. Yet, it probably costs the same to service the two accounts in terms of postage, reports, etc.

The above covers the fees for a taxable account and the traditional and ROTH IRA. Other accounts (e.g. education accounts, simple IRAs) have different fees.

PS. In my opinion, even with these fees, Vanguard still offers a much better deal compared to many other funds families.

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This entry was posted on Tuesday, October 17th, 2006 at 8:16 am and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.