How to manage a self-directed 401(k)?

January 31, 2011 10:13 AM

I need assistance investing a self-directed 401(k) now that Vanguard does not offer the service I have been using.

I work for a small company that has a 401(k) plan, but instead of a certain number of investment options available, it is self-directed. I believe most employees have a guy or a company or something that invests their 401(k) for them for a fee, but I (and a couple of others here) had been having my deferrals dumped straight into the Vanguard 500 index fund so that I could avoid paying anyone a fee. A few months ago myself and everyone else who had been doing that got a notice from Vanguard (similar to the one described here) that we couldn't do that anymore. Vanguard said they were discontinuing the program and we would have to go through a brokerage to buy the Vanguard 500. So I opened an Ameritrade account and have been buying the Vanguard 500 that way, but now when I get paid and my 401(k) election money and company match goes to Ameritrade they put it into a money market fund and then I have to buy the Vanguard 500 fund and they charge me like $25 to do so, which seems excessive. I am wondering if this is the ideal set up or whether I would benefit from a different arrangement.

In case it is relevant, I am in my early thirties, my 401(k) is currently worth in the neighborhood of $20k, and I have no intention of doing anything with the money until retirement. Also, in case it isn't obvious, I am so financially illiterate that it was difficult to even come up with the terminology to express this question as poorly as I have done, so please bear that in mind in answering. Thank you.

posted by anonymous to Work & Money (4 answers total)

Have you looked at ShareBuilder 401(k) for your company? http://www.sharebuilder401k.com/

They're a subsidiary of ING Bank, so it's not a fly-by-night outfit, and they seem to specialize in small business IRAs.
posted by chengjih at 10:38 AM on January 31, 2011

Are you buying the open-ended mutual fund (VFINX) or the ETF (VOO)? If it's the ETF, the problem is that you pay commission on ETFs just like any other stock.

If it's the mutual fund, your problem is that Ameritrade does not have a favorable setup with Vanguard. But they surely have another S&P 500 index product that is a) available transaction fee and b) an open-ended mutual fund and not an ETF.

I'd call Ameritrade and see if they can help you. Also, putting all your money in the S&P 500 may not be the best investment decision, but that's a whole other question.
posted by mullacc at 12:01 PM on January 31, 2011

Rather than contributing to the Vanguard 500 mutual fund, investigate buying the exchange-traded version of the same fund (ticker symbol: VOO). This won't cost you any more than a stock trade. That should cost you only $10 at Ameritrade.

Also, leave the money in the money market and buy the ETF quarterly to keep even that commission low. The rule of thumb that the Motley Fool people advise that you should pay no more than 1% in commissions, and the lower the better of course.

Once you have at least $25,000, take it to Wells Fargo and you will get 100 free trades a year. (If you have deposits, loans, or a mortgage at Wells, those can also count toward the $25,000.)
posted by kindall at 12:17 PM on January 31, 2011

Or, hm, open an account at Schwab and their ETFs can be purchased with no commission. Doesn't look like they have one for the S&P 500 but their large cap ETF should be broadly similar, with the 750 biggest stocks in the market.
posted by kindall at 7:00 AM on February 1, 2011