Vanguard or TIAA-CREF - Which one for the Little Guy?

By Jonathan Kandell, Contributing Writer

Vanguard is often touted as the fund company of choice for the small, no-nonsense index investor. Vanguard is a terrific company, but it is really set up to favor the investor with over $50,000 who doesn't have to pay the custodial charges and index fees. While these fees are fair in terms of the higher costs of administering small accounts, they still represent a competitive disadvantage. TIAA-CREF, a comparable mutual fund company, offers many funds that can be a better deal for the small investor.[1]

"What our fee structure does is recognize the efficiencies of the larger accounts. Those responsible for efficiencies should be the beneficiaries of them. As it is, it takes the fund years to break even at the lower account levels. The point of our fees is that it's a fairer allocation of cost. You're really subsidizing the smaller investor. If you incur costs, you should have to pay for them. . . Also, in a taxable account, if you intend to switch when you hit the $10,000 threshold, the tax consequences could be significant."

                                           -Brian Mattes, Principal, The Vanguard Group

"The significance of low expenses is simple to explain - they result in more money going to work for investors. Therefore, whether talking about small or large investors, TIAA-CREF believes that they appreciate having more money wind up in their accounts, rather than with fund companies. Even for small investors, the impact of expenses can be dramatic, particularly over long periods of time. And, since small investors will have less earnings in terms of actual dollars, they should look to keep as many of them as possible by investing in low-cost funds."

                                   -Tom Pinto, Director, Media Relations, TIAA-CREF

Fees and Expense Ratios

Vanguard charges investors a $10 maintenance fee per year on each index fund with less than $10,000 of assets. There is an additional $10 IRA custodial fee for each fund with less than $5,000 unless total assets are more than $50,000. So one's total fees will amount to either $10 or $20 per fund per year depending on the size of one's investments.

While TIAA-CREF does not charge either of these fees, its funds have higher expense ratios (ERs) than Vanguard's across the board. Expense ratio costs come straight out of returns. So in comparing funds the question becomes, "At what point do the expected higher returns resulting from a lower expense ratio make up for the added fees?"

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