Taxable Fund Accounts

Because of capital gains, taxable accounts are more complicated than the above straightforward analysis. Most small investors intend to become large investors eventually. If you want to use TIAA-CREF as a small investor and Vanguard as a large investor, then you will have to pay the cost of switching. The loss of compounding capital to taxation incurred in switching funds would almost certainly drown out any of the above savings in fees. This effectively means that with taxable accounts, one should stick with the original company until redemption, and this changes the economics of comparison.

The decision on which company to chose for these funds depends essentially on one's time-horizon. Long-term investors who start with Vanguard will lose out on the fees until the fund reaches $10,000 ($6,667 in the case of the international equity funds), and then start saving from that point on.[6] But because it takes time for the Vanguard ER gains to overcome the accumulated and compounded fee losses, the actual break-even figure will be higher than those in the chart. To be more precise, the actual "break-even" point depends on the size of one's original investment, the rate of return, and the ER spread.[7]

Figure 2: Total Stock Market, one-time investment of $5000
Time-horizon when it pays to start with Vanguard over TIAA-CREF

Figure 3: Bond Funds, one-time investment of $5000
Time-horizon when it pays to start with Vanguard over TIAA-CREF

As can be seen by these charts, the number of years it takes to justify starting with Vanguard is surprisingly large. As we might expect, the higher the rate of expected return, the lower the break-even point. These figures assume even regular returns and that money is not added to the original investment.

Diversification

TIAA-CREF doesn't offer small or value funds, so you need to use Vanguard if you are concerned with those classes (although the International Equity fund is 33% small). TIAA-CREF does not offer various other funds available at Vanguard either. However, I would argue it is hard to justify complex "slice and dice" beyond broad categories for small investors. Frankly, the hypothetical benefits of subdividing into classes more esoteric than the broad asset categories of Long- and Short-term Bond, Cash, Domestic Equity, and International Equity found at TIAA-CREF are dubious at small amounts.

In fact, if you take fund minimums into account, TIAA-CREF allows more meaningful diversification for the beginning investor. TIAA-CREF has rock-bottom minimums on both IRA and non-IRA accounts: $250 per fund (less if you pay in paycheck installments). This is in comparison to Vanguard's $1000 minimums for IRAs and $3000 for regular accounts. So the small investor can divide into many more funds with the same assets at TIAA-CREF in comparison to what they could do at Vanguard, and they can do it without the expense of annual maintenance fees.

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