The Wise Cracks Blog by Dan Otter

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Education
Advocacy

I Moved Money Out of Vanguard

Shocking headline, right? So why did I do this? What was I thinking? Isn’t 403(b)wise all about access to low-cost investments? Well you see, a really nice sales agent came into my staff lounge promising all the upside of the market without the risk. Plus, he had donuts. Really sugary ones. I am kidding of course. Vanguard, I still love you. It’s not you. It’s me.

Backstory and Key Numbers

Over the years, you collect stuff. Sometimes, lots of stuff. That is what happened to our retirement portfolio. Between my wife and myself, we had more than a dozen different accounts (403(b)s, 457(b)s, SEP IRAs, Simple 401(k), Roth IRAs, Rollover IRAs) spread across three vendors: Fidelity, TIAA-CREF, and Vanguard. Personally, I had four 403(b) accounts and two 457(b) plans.  

  • 70 was our percentage of assets in equities
  • 30 was our percentage of assets in fixed investments, primarily bonds
  • 22 was our percentage of equities that were in international stocks
  • 2 was the percentage of return of our fixed investments

I am lucky to not only call planner and podcaster partner Scott Dauenhauer, CFP, a friend, I can also call him my advisor. This spring we began to look at consolidating and improving our retirement plans. Scott’s goal was to two-fold: consolidate as much as possible while maximizing the investments options at various employers, present and past. This was one of the coolest things I learned during this process. Although I was no longer working at the University of New Mexico (UNM), I still had a 403(b) and a 457(b) plan there. UNM has a pretty good Supplemental Retirement Annuity (GSRA) version of the TIAA Traditional that was paying 3.25 percent with a guaranteed minimum rate of return of 3 percent. As a result we moved a significant amount of bond money from a Vanguard SEP IRA into that account.  

Bye Bye Bonds

Scott on moving from bond funds to this TIAA option: “Your fixed income was mostly intermediate term bonds and the yield was only in the mid two percent range, yet if interest rates were to rise by 1 percent, the value of your bond fund holdings would drop 5 percent to 6 percent. By moving to this option, we increased your rate of return by almost 1 percent and cut off the downside if interest rates were to rise. It was the best of both worlds. Since the GSRA version is fully liquid, if interest rates do rise and the rate doesn’t adjust accordingly, you can simply move your money to another option with no penalties (note: not all TIAA Traditional versions have this as a feature).”

The move is not without risk.

Scott: “There are a few downsides though. First, you are now reliant on TIAA to remain a stable company (this is referred to as single issue credit risk or counterparty risk). Should they get into financial trouble, the assets of the TIAA Traditional are subject to the creditors of the organization. Your credit risk was spread across many other issuers with the bond fund. We are OK with this for a few reasons: First, TIAA is one of the largest and most stable insurance companies in the United States and they maintained good credit ratings throughout the financial crisis. Second, the GSRA version allows daily liquidity and if there was a hint of risk you could move the money that day to a option that doesn’t have counterparty risk. Third, the company is systemically important and likely too big to fail (though they have not been officially labeled as such). At the end of the day we felt comfortable with the single issuer risk in this particular situation.”

When Scott pitched this idea to us, I have to admit I was a bit uneasy. I mean, what would John Bogle say? Plus, who moves money out of Vanguard? In fact, when I first called the company to initiate the transfer (with Scott on the line), I actually apologized. I said something like “I love Vanguard and my wife and I are still keeping a bunch of money with you, but we are doing this because of the better fixed choice.” They didn’t try and talk me out of it. But they did make it difficult. I don’t think it was purposeful, but my transfer slipped through a bunch of cracks. Ultimately it took more than four phone calls and close to two months to finally transfer the money. Vanguard made it frustrating which is what a lot teachers say about annuity companies.

14 to 9 and 70 to 60

We moved from 14 retirement accounts to 9 and we trimmed a little bit of risk. Said Scott: We didn’t actually change your overall asset allocation by much. You had a mix of 30 percent less risky assets and 70 percent risky assets. We lowered the risky portion to 60 percent. We then focused on the internal allocations. We made significant changes to the fixed income component and expanded your equity allocation to be much more global in nature.”

Lucky to Know Scott

I had the luxury of Scott’s help. Plus, we were dealing with a very reputable company (Vanguard). I want to emphasize we still have a significant amount of money at Vanguard (and Fidelity) and we are contributing monthly to the accounts at these companies. I really feel for the investors out there who are stuck with crap choices from crap companies. They often don’t know who to turn to for help. Without Scott, I may have given up. It wasn’t like I was stuck in equity indexed annuities. I had some pretty good, low cost choices. Most of the money at Vanguard was in target date funds. Now my Vanguard account is 100 percent equities. As I mentioned I continue to contribute regularly to accounts there. Despite this, John Bogle will not return my calls. 

Get Help

I would encourage anyone contemplating plan transfers and reallocation to consult our Advice section and other resources. The New York Times, Kiplinger’s Personal Finance, Money Magazine and Consumer Reports are among the most reputable resources available. If you plan to work with an advisor these resources may help:

Post questions on our Discussion Board — you will need to register and be approved to post. We get A LOT of attempted SPAM enrollments. So to speed up the process shoot me an email notifying me of your registration: dan(at)403bwise.com