Feb 29th, 2008
The Vanguard Brokerage Option: First Look
Not long ago, Vanguard, the large mutual fund family that I speak highly of and the administrator of my 403(b) plan, began offering a “brokerage option” in the 403(b) plan. I found the news exciting and called immediately to get signed on; unfortunately, they were not ready at the time, so I called back a week later and now, two weeks later and just as I was getting ready to call back again, the large white envelope from Vanguard arrived.
In this instance, the brokerage option means that I can use a certain percentage of the money in my 403(b) plan to make investments that are not in the selections offered by the plan. For instance, while my Vanguard sponsored plan offers many Vanguard (and a few other) mutual funds, it does not offer two funds that I am very interested in: the Vanguard GNMA Fund and the Vanguard Total International Stock Index Fund. With the brokerage option, this will be possible, but the most important information would be what kinds of fees would be associated with this feature.
Reading through the documents, I found the plan to my liking. Very appropriately, the first words on the Investor’s Guide are “More choice for the experienced investor”. True, there is more choice, and also true but more implied than stated, this is for an experienced investor–non-experienced investors would definitely be better served with less choice in funds and sticking to a few index funds.
Costs for the funds I would want seem to be non-existant. no transaction fees for Vanguard funds (the two I’m interested in are Vanguard funds) and I easily meet their minimums. Up to a maximum of 50% of the account can be in the brokerage option; it’s about 50% of the account that I would want to be in those funds, although I think I will split my fixed income allocation equally between the Vanguard GNMA Fund and the Vanguard Total Bond Market Index.
While I find this option to be very enticing, I would recommend against it for the vast majority of investors. So many plan holders say they don’t know what to do, so part of the beauty of a well managed 401(k) or 403(b) is to offer investors not just a choice of funds, but a winning, limited choice of funds. When investors have every choice under the sun and not enough knowledge to make great ones, limiting choices may be the way to help them.
For those investors who are sure of what they want, the brokerage option offered by some 401(k) and equivalent plans can be a Godsend. I’ll continue blogging about my experiences with it as I have them. In the meantime, I’m sending in my registration for it today.
[...] a package from the Pennsylvania mutual fund giant showed up in my mailbox. In it was a pamphlet on the brokerage option that I mentioned previously (and which I already had) and a few pieces of paper explaining some of the [...]