October 11, 2011

Vanguard Launches 401(k) Plan for Small Businesses

Index fund inclusion keeps expenses low

Vanguard launched a small business 401(k) plan service in September that provides a low-cost plan, including index funds and target-date funds, in a bundled retirement plan package. The service is provided directly to sponsors of 401(k) and profit-sharing plans with assets up to $20 million, as well as to advisors who sell fee-based 401(k) plans.

The plan fees, comprising total investment, record-keeping, and administration costs, are anticipated to be among the lowest in the small-plans market, the company said in a statement. Research on 401(k) plan fees done by the Investment Company Institute and Deloitte Consulting shows that industry median all-in fees are 1.27% of plan assets for plans between $1 million and $10 million in assets.

The new Vanguard service all-in fee for a hypothetical plan with $5 million in assets, an average account balance of $50,000, and an investment lineup of Vanguard index and active funds was estimated at 0.32% of plan assets (actual pricing will depend on a plan’s investment options, demographics, and ancillary services).

Low fund expense ratios are the primary driver, according to the company, with an average annual fund expense ratio of 0.21%, compared with the industry average of 1.15%. This allows investors to keep more of what they earn. Also, plan sponsors have flexibility in paying for their plan’s costs.

The service emphasizes low-cost Vanguard broad-market index funds, including Vanguard Target Retirement Funds. Sponsors may also choose among low-cost Vanguard money market funds, actively managed funds, and ETFs, as well as non-Vanguard active funds and stable value funds. Advisors will have the ability to build model portfolios leveraging the low-cost funds in a plan’s investment lineup.

The bundled nature of the service simplifies plan management for small businesses. Record-keeping and other services are provided through Ascensus, one of the nation’s top record-keeping firms, and include a call center, compliance testing and documentation, participant education materials, dedicated plan sponsor and participant websites, and trustee services. Among optional services are participant advice and self-directed brokerage.

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