An earlier version of this story stated incorrectly that Vanguard waives an investment management fee for 403(b) participants if they have non-403(b) accounts with the company in excess of $50,000. It is an annual fee that is waived.
Vanguard Group, one of the largest providers of defined contribution plans, is outsourcing record keeping of some of its 403(b) plan business to Newport Group Inc.
The firm, which provides record-keeping services for
more than $400 billion in DC-plan assets, is partnering with Newport on small-market 403(b) plans. 403(b)s are 401(k)-type plans for public educational institutions, nonprofit employers and church organizations.
Newport Group provides record keeping for $80 billion in retirement assets.
The strategy isn't unprecedented — it follows on a similar partnership Vanguard
forged with Ascensus Inc. in 2011 for small 401(k) plans. Vanguard considers "small" plans — both in the 403(b) and 401(k) markets — as those with fewer than $20 million in assets.
The move with Newport Group affects roughly $10 billion in participant assets, a small portion of its overall DC-plan book of business. However, for those affected, the move is likely to have mixed results, based on details of the business partnership, advisers indicated.
Vanguard believes the partnership will offer participants new benefits, including Roth contributions, loans, an enhanced web experience and availability of funds with lower fees, according to spokesman Timothy Stokes. And plan sponsors will enjoy improved record keeping and reporting, online plan management capabilities and enhanced client support, he said.
(More: Private equity adds fuel to 401(k) record-keeper consolidation)
However, some advisers see a few negatives for plan participants.
"There are pros and cons to this move for Vanguard participants," said Scott Dauenhauer, principal and owner of Meridian Wealth Management. "The winners are those who have higher balances and those who [invest in] multiple funds. The losers are smaller-balance participants."
Currently, Vanguard assesses 403(b) participants a $15 annual fee per mutual fund, in addition to the funds' investment-management fee. (The $15 annual fee per mutual fund is currently waived for participants with non-403(b) assets held at Vanguard exceeding $50,000.) Vanguard offers its Investor share class of funds, but not its lower-cost Admiral share class.
Following clients' transition to the Newport platform, which is occurring through the remainder of the year, participants will pay a flat $5 monthly administration fee ($60 annually) rather than the per-fund fee. They will also gain access to Vanguard's Admiral shares.
Vanguard's Total Stock Market Index fund has an expense ratio of 0.04% for its Admiral share class (VTSAX), compared with 0.15% for its Investor class (VTSMX), for example.
However, not all Vanguard funds have an Admiral share class. That includes target-date funds, which have quickly become some of the most popular funds in DC plans.
Here's a comparison between the current and old Vanguard programs, using the example of a TDF investor in the Vanguard Target Retirement 2035 fund (VTTHX), which has an expense ratio of 0.15%. A $10,000 account would pay $75 per year, or 0.75%, in total fees in the new program, instead of $30, or 0.30%, currently.
The higher the balance the smaller the disparity becomes, Mr. Dauenhauer said. A $100,000 account would pay $210 per year instead of $165.
"It sounds like it's more convenient for Vanguard, but not necessarily in" the best interests of all customers, Mr. Dauenhauer said. "$60 per year just to have the account is expensive. It's going to hurt the smaller investors."
