Vanguard Cash Balance Plans: Here’s What They Don’t Tell You

Vanguard has established themselves as one of the leaders in the discount brokerage space. But what about Vanguard cash balance plans? Do they offer them? How do they work?

In this post, we will take a closer look at Vanguard in the cash balance plan and defined benefit plan arena. The goal is to offer some basic insights into what they offer and how your business can benefit.

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But before we dive in, please remember that cash balance plans are a very specific retirement area. Many people don’t understand even the basics. This can even be the case when you deal with the large custodians. More about that in a moment.

The Vanguard Cash Balance Plan

First of all, we love working with Vanguard. But I’m not sure that you know that Vanguard no longer administers cash balance plans. You can find out more about that here.

Most of our clients use Vanguard or Schwab as the custodians for our plans (Fidelity is probably third). They have a low cost investment approach that offers discount fees and a wide variety of investment offerings. For these reasons, they are tough to beat.

Many business owners will check with Vanguard first because they may already have a solo 401k or IRA with them. That way they can keep the same log in and have them manage multiple accounts. This makes a lot of sense. Why have many different custodians? I get the point.

What is a Pension Trust?

But most people who want to use Vanguard as a custodian believe that the cash balance plan has to be opened with them. This is far from the truth. In fact, when you set up a cash balance plan you will get a trust agreement and a tax ID # (or EIN).

With these, you can open up a “pension trust” at basically any custodian. Opening these accounts can be challenging if you go into your local bank. But with the large brokerages it is generally a simple process.

Vanguard will have no problem opening up a pension trust (especially with our help). But do they set up the plans themselves? Like most custodians, they don’t offer a great solution for small business owners.

In fact, if you call the main Vanguard retirement line and ask about the plans you will likely get an entry level customer service employee who is used to setting up IRAs or solo 401ks. They just don’t have many people inquire about cash balance plans. I know. I’ve tried many times.

If you have a large plan for 100+ employees, they can work well as they have an institutional side of the business. You can find out more information here.

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But if you are a small business owner with either zero or a few employees then you may find it more challenging. Most custodians really just want your funds under management. That way they can garner the fees (even if they are low). So they are happy having third-party administrators set up the plans.

Pros & Cons?

But the important part to understand is that you don’t have to have your plan set up with Vanguard in order for you to have them as your custodian. We are talking about two different things. One is the custodian (Vanguard) and the other is the third-party administrator (that’s us).

We know that owners want maximum control over their retirement plan assets. Even though cash balance plans can invest in almost any type of asset. When you deal directly with the custodian, their plans may not offer the flexibility to essentially self-direct your assets. As such, you are almost held captive to their funds and investments.

Now this may not be a bad thing if you really like their investment options and choices. But what if their platform changes down the road? What if they decide at some point to increase fees? You could get stuck holding the bag.

That is why we assist businesses with self directed 401k structures so that they can invest in alternative assets.

About Emparion Cash Balance Plans

The beauty about our plans is that they are portable. You can use them with Vanguard or any other financial advisor or custodian.

As part of our services, we try to differentiate our services from other providers. Once we have some basic information about your age, business income, employee census and a couple other things, we can provide a custom illustration that will give you an idea of contribution amounts. For new clients we will provide the following support:

• Free custom plan design;
• Establish all documents (including adoption agreement) and IRS EIN;
• A thorough plan review by an actuary; and
• Communication and coordination of set-up with your CPA and financial advisor (even with Vanguard).

Look. We understand that cash balance plans can be difficult to understand. We also know that CPAs (including tax professionals) and financial advisors are often not the best help. It’s not because they are naive, it’s just that most don’t have the expertise to understand how the plans actually work.

But for us, we don’t handle your money. So we have no conflict. You use whatever financial advisor or custodian you want. We’ll even help you get your account opened with them!

Remember also that with our pension plans you can invest in basically anything on the Vanguard platform, but you can also invest in alternative assets. In addition to basic investment options like stocks, bonds, CDs and mutual funds, you can use our plans with other investments. This would include real estate, commercial notes, hedge funds, private equity, gold and other commodities, and much more.

Now this may not be of interest to you, but it’s always nice to have the option. Flexibility and diversity is the key to successful retirement planning.

How to set up plan with Vanguard

• Find a third-party administrator. Since Vanguard does not provide administration services for cash balance plans you will need to first find a third-party administrator.
• Establish a custom plan that will work on the Vanguard platform. Once you have located an administrator make sure that the plan will work Vanguard’s platform.
• Open up Vanguard investment account. Once the account is open make sure that you make your investment allocation. Remember that your plan investments should try to match the cash balance plan crediting rate.
• Fund the plan. You may want to make a partial funding. But also know that you have up to the date you file your taxes (including extensions) to fund the plan.
• Don’t forget your accountant. You may need to fill your accountant in on the details. These plans can be complicated and your accountant needs to understand the plan structure.

The table below provides a nice summary:

Final Thoughts About Vanguard Cash Balance Plans

Like I have said before, Vanguard is a great retirement provider. I don’t think you can go wrong with their service offering.

But the key thing for you to consider is whether they can provide you the services you are looking for. Will they provide a custom plan? What about tax structuring?

So the decision is yours. We offer a quick start set-up and will typically have your plan drafted in 3-5 business days. From there, once we get it over to Vanguard your investment account is usually up and running in a week or so. In either case, if you are a high income business owner, you can’t go wrong with a cash balance plan.