Vanguard Cap Gains

IRA Accounts

Let's use the total stock market funds as an example. Vanguard's Total Stock Market Index Fund has an ER of 20 basis points. TIAA-CREF's equivalent fund, its Equity Index Fund, has an ER of 26 basis points. At what level of total net assets does the 6 basis points difference equal the equivalent of the $10/$20 in fees? Simple arithmetic shows the TIAA-CREF expense ratio will be less than the Vanguard fees until assets in the fund are $10,000 or more (6 basis points x $10,000 = $6).[2] At less than this, you save more by not paying fees than you make in lower expenses, and vice versa. In other words, until your IRA Total Stock Market Fund allocation reaches $10,000 use TIAA-CREF's Equity Index Fund. After that point, roll over to Vanguard.

Let's look at the two short-term bond funds. Vanguard's Short-term Bond Index Fund has an ER of 20 basis points. TIAA-CREF's Short-Term Bond Fund has an ER of 30 basis points. At what point does the 10 basis point difference break even with the $10/$20 fees? 10 basis points is equal to $10 when assets are $10,000.[3] So, again, if your short-term bond allocation is less than $10,000 use TIAA-CREF. After that point roll over to Vanguard.

TIAA-CREF's equity funds, aside from its Equity Index Fund, use a "dual investment strategy." Part of the fund tracks the index and the rest is managed. The fund manager has the flexibility of keeping between 20 and 80% of the fund under enhanced passive management or under active management. While the merits of this strategy are debatable in general terms, it doesn't cost the investor anything at the low expenses TIAA-CREF offers, and may even add value. A TIAA-CREF official noted that most of the equity funds are currently about 50/50 active/passive.

Using the same reasoning, here is a run-down of where various other funds break-even.[4]

Figure 1: Break-even point for various funds
when you should switch from TIAA-CREF to Vanguard

Type of fund	ER TIAA-CREF	ER Vang.	IRA Break-even
Total Stock Market	26 (TCEIX)	20 (VTSMX)	$10,000
International equity	49 (TIINX)	34 (VGTSX)	$6,667
Social Choice Equity	27 (TCSCX)	25 (VCSIX)	$10,000
Total Bond	30 (TIPBX)	20 (VBMSX)	$10,000
Short-term bond	30 (TCSTX)	20 (VBISX)	$10,000

So, in short, with the exception of international, TIAA-CREF is a wiser place to invest for the IRA investor with less than $10,000 per fund. IRA investors should start with TIAA-CREF and switch to Vanguard once their funds get above the figures in the chart above.[5] Depending on how many funds one has, the amount of money saved could be significant.