The Vanguard Group has developed Vanguard Retirement Plan Access, a 401(k) product, especially for small businesses. It makes it easy for new or modestly sized employers to offer employees the same retirement savings benefits as larger companies. These types of small business offerings from large-scale institutions are relatively new, but they can take a lot of the guesswork out of selecting a plan for small business owners who are less likely to know what to look for than trained benefits specialists at larger firms.
Vanguard is one of the most respected names in the investment community, with a wide range of products, including mutual funds, exchange-traded funds (ETFs) and retirement plans. Vanguard products are extremely popular and have a proven track record even among investors not managed directly with Vanguard. For example, the Vanguard Institutional Index mutual fund is one of the most common funds included in 401(k) portfolios from any provider. This ultra-low-cost fund tracks the S&P 500 and has a five-year annualized return of over 13% with a very modest expense ratio of 0.04%.
To some degree, many 401(k) plans are alike in terms of how much can be saved and what kind of tax benefits are available. However, because Vanguard offers some of the most successful investment funds around and, in many cases, charges lower fees than its competitors, a Vanguard 401(k) can be an especially cost-effective choice.
What Is Included?
Just like any other 401(k), the Vanguard 401(k) product for small businesses offers professional management, a wide range of investment options and a customizable product that lets employers dictate the specific terms of their plans. The small business 401(k) provides day-to-day plan support for the sponsoring employer, including real-time compliance testing to ensure the plan retains its tax-advantaged status.
Types of Investments
Most 401(k) plans rely on mutual fund investments, and the Vanguard Retirement Plan Access product is no different. However, it provides access to a wide range of passively and actively managed funds, meaning participants can fine-tune their portfolios if they so choose.
This plan provides access to all of Vanguard's mutual funds, as well as over 10,000 outside funds. Participating employees may elect to invest in company stock through a self-directed brokerage account within the plan.
Like any other 401(k), Vanguard Retirement Plan Access allows employees to select the amount of each paycheck they want to defer to their retirement accounts. Depending on the terms of the plan, employees may also be able to make after-tax contributions to designated Roth accounts.
Vanguard Retirement Plan Access also accepts employer contributions. The sponsoring employer can tailor the plan to provide for direct contributions or employee contribution matching.
All contributions to Vanguard's small business product are subject to the same IRS limits as any other 401(k).
One of the most appealing aspects of 401(k) plans is the tax benefits they provide for employees and employers. Like other products, the Vanguard small business 401(k) allows employees to set aside money each month without paying taxes on that income. Though income tax is due at the time of withdrawal, most people are in lower tax brackets after retirement, so their total tax burdens are reduced.
Employers can also lower their tax loads each year by contributing to employee retirement accounts. Under the Vanguard plan, like other plans, employers can deduct contributions to 401(k) accounts up to 25% of employee salary.
What Does It Cost?
Historically, offering 401(k) plans has proven expensive for small businesses; products designed for large-scale operations end up charging the same fees for the setup and administration of small plans as they would for larger corporate plans. Since many small businesses don't employ trained benefit specialists, the person selecting the plan may not know what to watch out for.
Vanguard Retirement Plan Access is transparent and reduces fees wherever possible. While all 401(k) plans require administrative fees, small businesses don't require the same amount of work as larger plans, so lower fees make sense.
Vanguard's product chargers a per-participant record-keeping fee instead of increasing expenses as the plan's assets grow over time. In addition, the plan offers a record-keeping fee credit to defray this cost. Vanguard has also eliminated the unnecessary plan setup fee. To maintain transparency, the Vanguard plan offers a detailed expense report that outlines exactly where each nickel and dime gets spent and provides employers with a single comprehensive expense figure.