Does anyone understand Vanguard's new small-plan package?

[Peter Gulia]

About Vanguard's package for a retirement plan under $20 million, Vanguard's website says:

"You can choose funds that use Vanguard Investor Shares or funds that use the lowest-cost Vanguard share class available. The plan receives credit for all Vanguard Investor Share assets, which can reduce and potentially eliminate out-of-pocket recordkeeping fees. Using funds with the lowest-cost share class can allocate expenses evenly across all participants if you decide to cover costs using a per-participant fee."

I'm not seeking particular price information, but rather wondering whether anyone has done some comparison (assuming a plan would qualify for the lower-cost share class) between choosing the "Investor" shares to get indirect compensation against the recordkeeper's fees and using lower-cost shares so that participants' accounts bear the recordkeeper's fees directly? (Assume that the employer doesn't pay the plan's administration expenses (or that the amount the employer is willing to pay is constant for all possible fee configurations).)

Within the range of plans that can qualify for lower-cost shares, is there ever a situation in which it would be to the plan's advantage to choose the deliberately more expensive shares?

[GMK]

Can't say I fully understand it, but from the proposals we've seen, I think there is a slight overall advantage for the plan to use the lower-cost shares.

Vanguard charges a base fee that depends on the number of participants. If you use Vanguard investor funds, Vanguard gets 0.1% of the expense ratio for record keeping. They subtract this from the base fee that the plan pays. I assume that the lower-cost shares don't pay the record keeping fee credit, so the plan pays the total base fee, and the participants get the lower expense ratios.

I haven't run the numbers, but generally the expense ratios for Signal or Admiral funds are less than for Investor funds by more than 0.1%, like 0.06% vs. 0.18% for Total Stock Market Index. So, the lower-cost funds give a lower all-in cost.

A sponsor might look at using investor funds to save a little money by putting more of the cost on the participants, but this is not the best fiduciary choice for the plan when a lower total cost approach is available for the same investments and services.

[Peter Gulia]

GMK, thank you for confirming what I expected.

And just to be clear, if a plan chooses the Investor shares (or doesn't qualify for another class), Vanguard pays 10 bps to Ascensus (the recordkeeper)?

And do we know whether Vanguard is willing to pay the 10 bps (or some different allowance) to some other recordkeeper?

[GMK]

They call it a recordkeeping credit, so I imagine it goes to Ascensus, whom they identify as the recordkeeper for these plans.

I don't know if Vanguard would allow one to chose a different recordkeeper with their small-plan package.