Brokerage

Minimizing fees with Saturna HSA

This year I became eligible to contribute to a Health Savings Account (HSA). After reviewing many web resources, including

I shortlisted three HSA provider options:

  1. The HSA Authority
  2. Lively HSA : LINK to Boglehead discussion.
  3. Saturna HSA : LINK to Boglehead discussion.

Selection Criteria

My primary purpose of having the HSA is for investing. My HSA provider selection criteria include

  • No wrap fees. Any HSA with wrap fee is a non-starter for me. HSAs that have wrap fees are eliminated and not considered.
  • First dollar investing. Several HSAs require you to keep a certain amount of money in a (usually) low paying savings account before you can invest your money or to waive their fees. The amount of money could range from $1,000 to $5,000. To me, this is a “cash drag penalty” on investments. If we assume a yearly portfolio return of 5% to 6%, the “implicit fee” in having each $1,000 kept in cash could be like $50/year. If we do not put a value to the implicit fee, we would not realize how huge this fee could be. For example, HSA Bank offers to waive the total $5.50/month fee if $5,000 is kept in cash. Seriously? The implicit fee for this is like $250/year.
  • Access to low cost funds. I give preference to HSAs with funds that have low expense ratios.
  • Low fees. The lower the monthly or yearly maintenance or account fees, the better.

The HSA Authority

  • First dollar investing.
  • $36/year fee to invest in mutual funds. Investment options include Vanguard S&P500, TSM (both with ER 0.04%), Emerging Mkts (ER 0.14%), EAFE (ER 0.17%), short term bond index (ER 0.07%). Other options include SmallCap, MidCap, TIPS, REIT and Lifestrategy funds from Vanguard.

Lively HSA

  • First dollar investing.
  • $2.50/month for access to TD Ameritrade’s brokerage, with >100 commission-free ETFs (including Vanguard ETFs). Fee apparently is paid from outside the HSA (good).
  • CON: brand new startup.

Saturna HSA

  • First dollar investing.
  • Mutual funds and ETFs are available through their brokerage. Transaction fees: $0 for NTF mutual fund trade, $14.95 for each ETF/stock trade, $24.95 for Vanguard or Fidelity mutual fund trade. LINK to the list of NTF funds at Saturna.
  • Requires a minimum of one transaction per calendar year. Otherwise there is a yearly $25 inactivity fee, which is reduced to $12.50 if the account only holds mutual funds.
  • CON: Lengthy application forms which must be sent in through snail mail.

After reviewing and reminding myself that I would probably be making only one transaction a year, I decided to go with Saturna. However, if I would be making more than one transaction a year, Lively and The HSA Authority are probably better choices.

Fee minimization strategy

Using Saturna, and limiting to one ETF trade a year, the HSA running cost is $14.95/year. However, I realized that by bunching ETF purchases to once every two years, I can save on commission fees even more. The following is one such strategy:

  • Year One: Invest the entire Year One HSA contribution into T.Rowe Price’s S&P 500 index fund PREIX (ER 0.21%). This is a NTF fund (no trade fee, $2,500 minimum, 6-month holding period).
  • Year Two (January): Sell all PREIX, add the proceeds to Year Two contribution and purchase the Schwab International Equity ETF SCHF (ER 0.06%) for a $14.95 trade fee.
  • Year Three (January): Put the entire Year Three contribution and any SCHF dividends into PREIX. Make no change to SCHF.
  • Year Four (January): Sell all PREIX, add the proceeds and any SCHF dividends to Year Four contribution and purchase more SCHF for a $14.95 trade fee.
  • And so on.

Notes

  • Because the NTF fund PREIX has a higher expense ratio compared to the equivalent products from Vanguard or Schwab, there is an implicit fee in using PREIX. Assuming Vanguard’s US LargeCap ETF has an ER of 0.05%, this implicit fee is an ER difference of 0.21% – 0.05% = 0.16%. This fee is applicable one out of every two years (years 1, 3, 5 etc.) and is roughly limited to the yearly contribution amount of around $6,800. So on average, this fee is about 0.5 x 6,800 x 0.0016 = $5.44 / year (this fee could be a little higher, depending on the growth of the fund).
  • The ETF trade fee of $14.95 happens once every other year. On average, this fee is $7.48 / year.
  • Schwab’s SCHF was chosen because it only distributes its dividends once a year in December. In January, this dividend gets invested. On the other hand, if I were to use Vanguard’s VEA or VOO, I would have to deal with Q1, Q2 and Q3 dividend distributions.There is a fee to reinvest dividends from ETFs.
  • There is no fee to automatically reinvest dividends for PREIX.
  • It might appear that I am changing my asset allocation between US LargeCap and EAFE equity every year. In reality, I can make compensating trades in my other tax-advantaged IRAs to account for these changes.
  • There is a transaction every year, meeting the account activity requirement.

Conclusion

The total fee using the above Saturna HSA strategy is approximately $5.44 + $7.48 = $12.92/year. This is lower than either Lively’s $30/year or The HSA Authority’s $36/year.

Setting up a Small Business 401(k) Plan (Part 2)

[Part 1: Selecting a provider, Part 2: Selecting the investment options]

In this second part, we look at some of the investment options selected for the 401(k) plan. As a recap, the following were the objectives of the plan:

  • The Plan offers a choice of low cost mutual funds that cover diversified asset classes, and
  • The Plan is not overly expensive for the company to sponsor.

Based on the criteria given, the following requirements were put forth:

  • Simplicity — Provide three core asset classes for those who value simplicity.
  • Diversification — Provide exposure to the entire U.S. stock market, most of the international stock market and the U.S. aggregate bond market.
  • Low expenses — mutual funds with low expense ratios.
  • Target Retirement funds that own the core investments, rebalance automatically and become more conservative over time.

Investment Options

I worked with the Vanguard representatives, and came up with the following list of Vanguard mutual funds:

For ease of understanding, the investment options are divided into four groups.

  • Group A : This group consists of Target Retirement funds. These funds are for those who prefer simplicity above all else. Participants just pick the ONE fund that most closely matches the planned retirement year. These funds own all the core asset classes, re-balance automatically and become more conservative over time.
  • Group B : This group offers the core asset classes as individual funds for participants to mix and match their desired ratio. Participants can also use Group B to semi-manage and re-balance their portfolio in concert with their IRA or taxable account investments.
  • Group C :  This group offers additional asset classes for participants who want to duplicate Fama-French’s research.
  • Group D : This group offers cash equivalent investments, either a stable value fund or the federal money market, or both.

FAQ

Q. How are the investments options selected?

A. The investment options, in particular Groups A and B options, are modeled based upon the Federal Government’s Thrift Savings Plan (www.tsp.gov). The TSP is the largest defined contribution plan in the world and one of the very best. More information on TSP is available from searching on the web, e.g. from CBS News:

http://www.cbsnews.com/news/thrift-savings-plan-the-model-for-all-401k-plans/

 

Q. Why are there so many index funds?

A. Index funds have no manager risk, no style drift, no asset bloat, no fund overlap and never below average performance. For comparison to actively managed funds, please refer to this report which studies the relative outperformance or underperformance of actively managed funds against their benchmarks.

http://us.spindices.com/documents/spiva/spiva-us-year-end-2014.pdf

 

Q. I want to use the Target Retirement fund. Which one should I choose?

A. Please use this link from Vanguard

https://investor.vanguard.com/mutual-funds/target-retirement/#

to get more information. It helps you choose the appropriate fund given your age or years to retirement.

 

Q. What are the participant fees for the 401(k) plan?

A. The fees range from 0.05% to 0.31% per year. So on a $10,000 balance, participants will be paying not more than $31 per year.

Note that these fees are already reflected in the fund’s daily quoted price, i.e. there is no separate annual account fee. There is an administrative cost to sponsor the Plan; that cost is borne by the company.

Setting up a Small Business 401(k) Plan (Part 1)

[Part 1: Selecting a provider, Part 2: Selecting the investment options]

I was recently involved in helping to setup a 401(k) plan for a startup company. I thought I’d share the results of my research and my thoughts on this subject. I gathered my information from a variety of sources, including past coworkers, the Bogleheads forum and other online resources.

I was given the following criteria to work with:

  • The Plan should offer a choice of low cost mutual funds that cover diversified asset classes, and
  • The Plan is not overly expensive for the company to sponsor.

I obtained proposals from three different providers — ADP, Employee Fiduciary (EF) and Vanguard. The quotes are current as of Nov 2016, and for an initial 5 participants.

ADP

  • Setup cost = $0 (normally $1500, but waived)
  • Monthly base fee = $340 (yearly = $4080)
  • Per participant fee (per month) = $11.90
  • Asset-based fee = none
  • Note: ADP provided two options. IPS Zero and IPS Direct. IPS Zero offers low cost funds while IPS Direct offers more expensive funds and “kicks back” part of the fee to the sponsor by reducing the monthly and per participant fees. IPS Direct is not considered in this post.

Employee Fiduciary

  • Setup cost = $500
  • Yearly base fee = $1500 (up to 30 participants; additional $30 per participant)
  • Asset-based fee = 0.02% / quarter

Vanguard

  • Setup cost = $1000
  • Yearly base fee = $3475 (up to 15 participants; additional $75 per participant up to 50 participants)
  • Asset-based fee = none
  • Note: Vanguard offers a “recordkeeping” credit if investor shares are used instead of admiral or institutional shares. For comparison in this post, we only consider admiral or institutional shares for all three providers, so we will not apply this credit.

Comparison

The following table shows the yearly base fee and the asset-based fee for the three providers:

The cost of ADP is higher than Vanguard at every scenario, even accounting for the fee waiver when setting up the plan. So ADP can be dropped and we are left with comparing Employee Fiduciary with Vanguard.

Employee Fiduciary has a quarterly asset-based fee of 0.02% (or 0.08% per year). So the cost to use EF increases when the asset under management (AUM) increases. Vanguard does not impose a fee based on AUM.

Some sample AUM values are listed in the table above. Why these numbers are chosen is explained below:

  • $270k : this is 15 x $18,000, i.e. 15 participants with maximum contributions in a year (not adjusted for growth).
  • $540k : this is 2 x 15 x $18,000, i.e. 15 participants with maximum contributions for two years (not adjusted for growth).
  • $2.47m : this is the break-even point at which EF and Vanguard have the same fee for 5 to 15 participants.
  • $3.41m : this is the break-even point at which EF and Vanguard have the same fee for 25 participants.

Summary

When the asset in the plan is small, the lowest cost provider is EF. This “lower-cost” advantage will persist until the asset level reaches around $3m. Beyond $3m, the Vanguard plan becomes more cost effective than EF.

Other Considerations

Between EF and Vanguard, Vanguard has more brand name and is very well-known and established. EF is a smaller company founded in 2004. While it has very positive reviews on the web and was very prompt and polite in response to my inquiries, we cannot deny that it is a less known entity when compared to Vanguard.

If both EF and Vanguard offer the product at the same price point, Vanguard would be my preferred choice. However, if the AUM is expected to remain small for more than a few years, using EF is probably better since this will save the sponsoring company some money.