This website presents the ideas and thoughts of a friend. The information contained within should not be used to make investment decisions. Please contact a licensed certified financial planner before making any financial decisions.

Good Luck, and Good Investing.

  I've had so many people ask me how to switch that this will probably be the most visited section on the site.  

The first thing you should do if you want to switch to Vanguard is download the directions I wrote. These directions outline the procedure for switching. Click here for the directions. Then read them throughly before you do anything else. They will address all of the technical things you have to do to switch to Vanguard. What they don't address however is all the other "stuff" involved with switching.

I will try to address some of the "other stuff" by answering the questions I am most frequently asked.

  How do I learn about what I am paying in fees with my current provider?  
  I have created a list of questions that you should know the answer to before considering a change of providers. Click here to access the list. Use the list to find out exactly what you are currently paying for with your current provider.  
  Can I move the money I have at Equitable, MetLife, Valic etc. to my new account at Vanguard?  

The simple answer is probably.

You used to be able to do what is called a 90-24 transfer and with some relatively simple paperwork you could transfer the account. The Federal Government however changed their policy regarding transferring funds from one account to another and it's a little trickier now. If in fact you do want to complete this transfer, the companies you are transferring to and from must have signed a "Information Sharing Agreement (ISA)." The best thing to do if you want to transfer funds is call you business administrator and explain what you want to do and he/she should be able to tell you if you can. If you can't, find out why. Maybe one of the companies has refused to sign the ISA and you may be able to put pressure on them to sign it.

If you teach in Wayne as I do, I believe all our providers have signed the ISA, so if you want to transfer funds to Vanguard, the thing to do is call the Vanguard Small Business Services Department at 1-800-662-2003. It is Vanguard that will initiate the transfer so you should talk to them. Be aware that there could be penalties, also called surrender charges, when you move the money. More about that below.

If you decide to transfer your account balance to Vanguard, understand that Vanguard, or the institution you are transferring TO, handles the transfer. You contact Vanguard and tell them what you want to do and they will tell you how to do it. Basically you fill out a form and send it in to Vanguard and then they initiate the transfer. Click here to get to the Vanguard website. When you get to the Vanguard website type Direct Rollover Form in the search box in the top right corner of the screen and it should display a list of forms. The form you need is called the "Individual Retirement Plans Vanguard Direct Rollover Form." Simply download it and fill it out. If you need more help call Vanguard Small Business Services at 800-662-2003.

It is also appropriate to call your insurance rep and let them what you are doing in case there is any special paperwork you need to fill out for them and to find out about any surrender fees.

  Will it cost me anything to move my money from my current Insurance Company to Vanguard?  

It doesn't "cost" anything, unless your current provider has surrender charges.

Let me explain.

In many if not most cases, you can not do a 90-24 transfer without paying a penalty to your current provider. The penalty is different at different companies so you will need to find this out for yourself from your insurance rep, but I can give you an idea of how it works.

At AXA, they use a sliding scale to calculate your surrender fee. If you have been with them for more than (I think) 10 years, you can transfer your entire balance penalty free. If you have only been with them for one year you pay a penalty of around 6-7% and the penalty gradually goes down as your number of years increases. At Valic there is no longevity provision, they just have a flat penalty (I think) but you can transfer 10% of your balance each year without penalty until it is all gone.

The moral to the story is that you can do the transfer in some form but you really need to talk to your current rep to find out their companies policy. Please don't be afraid to talk to your rep, they are there to help you and that is what you are paying them for.

There is no penalty to move your 403(b)(7) from Vanguard to another financial institution.



  I'm going to move my money, will there be a penalty from the IRS?  

First of all the correct answer is "not if you do it right."

Since you are transferring from a qualified plan to a qualified plan,( a qualified plan means is is an employer sponsored plan and it qualifies for tax deductible contributions and tax deferred growth), you must never take possession of the money! If you have your insurance company send you a check for the value of your 403(b) account, and then try to send it to your account at Vanguard, you will pay a 10% penalty for an early withdrawl, (assuming you are less than 59 1/2 years old), plus you will have to claim the money on your income tax as regular earned income. As far as the federal government is concerned, you just took an early withdrawl from a qualified plan and that is a huge no-no. No matter what you do, never have them send you the money in a transfer.


It is also appropriate to call your insurance rep and let them what you are doing in case there is any special paperwork you need to fill out.

  Does it make sense to just pay the penalty and move the money?  

The answer to this question really depends on a couple of things.

The most important factors in this decision are probably your time horizon and how much money you have in there. For example, if you are 23 and only have a couple thousand dollars in your 403(b), it probably makes sense to move the money and pay the penalty. The reason you are moving to Vanguard is because you believe your money will grow faster there because of the lower fees, and even though you will pay a penalty now, you will likely make up for it over time because your money will grow faster at Vanguard and your long time horizon will give you plenty of time to make up the penalty. Plus the penalty won't be too much because you account balance is small.

If however you are 55 and have $300,000 in your 403(b), it probably doesn't make sense to move all your money over to Vanguard. You are probably going to pay a substantial penalty, plus your time horizon may not be long enough to allow the faster growth at Vanguard to make up for the money lost to the penalty.

The problem is that most of us are somewhere in between these two groups and it can be a tricky decision. Basically you have to do the math. How much will your penalty be compared to how long you have to make it up.

For better advice on whether it makes sense to pay the penalty you should probably speak with a financial adviser. You can get help finding a fee-only adviser by clicking here.

Just so you know, in my situation I have elected to leave my money with VALIC and slowly transfer it to Vanguard over time. VALIC allows you to transfer 10% of your account value every year without penalty so that's what I do. I didn't move it all because it is a decent amount of money and I couldn't stand the thought of paying them that big a penalty. Also, I choose to diversify my retirement savings by having a certain percentage in a fixed income investment and my money with VALIC is in their fixed income fund that has a guaranteed rate of return. I treat that money at VALIC as the fixed income portion of my retirement nest egg and all the money I have at Vanguard is invested in the stock market.

  At Vanguard there is a $15 fee per year per fund. If my 403(b) is in 4 funds at Vanguard, won't that eat into my retirement savings?  

You will have to do your own math on this but let me give you an idea of what the $15 fee per fund per year means at Vanguard.

Assume you have $50,000 in your 403(b) held with an Insurance Company and further assume your money is in 4 different funds.

The following numbers are approximate but I am quite sure they are close to actual. Please call your insurance rep for the exact numbers.

First you will pay about 1.25% in M&E and management fees: .0125 * $50,000 = $625
Then you will pay about 1.5% in expense ratios: .015 * $50,000 = $750
Total Yearly Fees and Expenses, approximately $1375

Now assume you have $50,000 in 4 funds in a 403(b)(7) at Vanguard.

First there are no M&E fees: 0 * $50,000 = $0
Then you will pay about .21% in expense ratios : .0021 * $50,000 = $105
Also you will pay a $15 per fund admistrative fee = $60
Total Yearly Fees and Expenses, approximately $165

Like I said, you need to do your own math but the numbers above are certainly well within the realm of accurate.

Obviously there are other differences between Vanguard and an Insurance Company and that is why you need to become fully educated about your choices.

Expenses should be just one factor in your decision.

  Are the mutual funds I invest in at Vanguard going to outperform the ones at my current provider?  
  This is a really simple one to answer: I have no idea, and don't let anyone else tell you that they know the answer either.  
  The reason people should be switching to Vanguard is not for better performing mutual funds. In fact, over the next 20 years, most mutual funds that seek to do the same thing, for example a Large Cap Value Fund at Vanguard or Fidelity or T. Rowe Price or American Funds will most likely perform about the same. Over short periods of time, one fund may in fact outperform another, but over long periods of time these funds will probably end up at about the same place. Even if one of them was going to outperform the others, how the heck are you supposed to know which one is going to do it.  
  The reason people should be citing for their reason for switching to Vanguard is because they have decided to learn about investing and choose their own asset allocation strategy, and because Vanguard allows them to invest cheaper, which means that over time they will keep more of thier money.  
  Why doesn't Vanguard send reps to our schools like the insurance companies do?  
  The reason is quite simple. Vanguard does not send any sales reps because they don't have any sales reps. Vanguard allows you to invest in the stock and bond market cheaper than pretty much any other investment company and probably the main reason they are the cheapest is they do not have to pay a sales force. Vanguard also does not have offices all over the country which also keeps their costs down and they also do not advertise on T.V. They do all these things to keep your costs down. In fact, Vanguard is a non-profit company.  
  Some facts about Vanguard.  
Vanguard was founded in 1975.
Vanguard has just 7 offices worldwide. They are in Pennsylvania, Arizona, North Carolina, Australia, Belgium, Singapore and Japan.
They offer about 185 different mutual fund choices.
They have approximately 22 million individual and institutional shareholder accounts.
There is over 1 trillion dollars invested through Vanguard.
  If Vanguard is so great, why haven't I ever heard of them?  
  Before you ask this question, ask youself how much you know about investing? If you are familiar with investing, then you probably know about Vanguard and you wouldn't be asking this question.  
  The other reason you may not have heard about them is because they only advertise in print. They do not advertise on T.V. Know why? It is expensive to advertise on T.V. Once again, they are able to offer investment options so much cheaper than everyone else because they keep their operating costs down and one way is by not advertising on T.V.  
  So how are there 22 million investors at Vangaurd if they don't advertise? Simple, good news travels fast.