Vanguard’s individual 401(k) is the best self-employed plan because there’s no cost to set up an account, and the only investment fees you pay are fund expenses – there are no sales loads or commissions on Vanguard exchange-traded funds (ETFs) and mutual funds to eat into your savings. In fact, one thing you’ll notice as you look into retirement plans is that a lot of other companies offer Vanguard funds as well because of these low fund expenses. The company does charge an annual account service fee, but it’s waivable, depending on your account balance.
Individual 401(k) plans are for small business owners with no employees. Visit our best picks page to see all of our recommendations for employee retirement plans.
In addition to individual 401(k) plans, Vanguard offers small business 401(k) plans, SEP and SIMPLE IRAs, as well as traditional and Roth IRAs. Vanguard has more than $5 trillion in investor assets under management and is the largest mutual funds provider in the world.
Pricing
Investment experts caution against paying too much in investment fees because they erode your returns, and even small percentages can impact potential long-term savings. Vanguard’s low fund expense ratios make it a popular choice among investors, and Vanguard is our best pick for individual 401(k) plan providers.
Individual 401(k) plans are best for self-employed people who want to save as much as possible in their retirement accounts, as you can contribute as both an employee and as an employer, and invest up to $56,000 per year (or up to $62,000 if you’re age 50 or older). Like other 401(k) plans, you can save up to $19,000 as an employee, and you can choose between tax-deferred or Roth contributions. Then, as an employer, you can contribute up to 25 percent of your self-employment income.
Here’s an overview of Vanguard’s pricing for individual 401(k) plans.
- Setup fee: None
- Minimum initial investment: None, but funds have a minimum investment of $1,000
- Average fund expense ratio: 0.11% for Admiral Shares, and 0.18% for Investor Shares
- Trading fees: All Vanguard ETF and mutual funds have no transaction fees
- Account service fee: $20 annually per fund. This fee is waived when you have an account balance of $50,000 or more (Other types of Vanguard accounts have different requirements to have this fee waived. For example, some of its account types only require you to sign up for electronic delivery instead of paper statements.)
Because this type of retirement vehicle is intended for higher savings, we didn’t deduct points for the account service fees, since they’re waivable with an account balance of $50,000. The rep we spoke with suggested investing in a single fund – such as a target date fund – to minimize this fee until you’re eligible to have it waived.
Features
Vanguard differs from many of its competitors in that it’s an online brokerage – it doesn’t have any physical offices where you meet with an in-person investment advisor. Instead, you set up your account and manage your investments online, which helps the company keep its costs low. It’s also different in that it’s not a publicly traded or privately owned company, rather it is owned by its investors. Here’s more information on its features.
Account setup: You can download the Individual 401(k) Employer Kit from Vanguard’s website. It includes instructions and all the forms you need to set up your account, including a plan adoption agreement and basic plan document. If you have questions or need help filling out the forms, you can call the company for help. Once you enroll as a Vanguard client, it takes seven to 10 business days to set up an individual 401(k) plan.
Investment choices: You can choose from more than 100 Vanguard mutual funds. Of these, 38 are index funds with Admiral Shares (a Vanguard share class that has a lower average expense ratio ranging from 0.04 to 0.45%, with an average of 0.11%).
Fund research tools: Vanguard provides multiple tools to help you research funds before you invest in them. You can do side-by-side comparisons, view historical charts that track a fund’s performance, search funds by your investment objective and create a watch list to monitor specific funds.
Advisory services: You can call the company and speak with a representative who can offer you guidance on your investments, but this account type isn’t available for Vanguard’s personal advisory services.
Reporting requirements: If your account reaches $250,000 or more in assets, you will be required to submit IRS Form 5500. The company will provide you with the information you need to complete this form.
Loans. No loans are available from this account.
Rollovers. If you have an old 401(k) accounts from a previous employer, you can’t roll it over into this account, but you can roll it over into a Vanguard IRA. If you call the company, a representative can help you set the IRA up and transfer your assets.
Withdrawals. Vanguard offers a free Required Minimum Distribution Service that calculates your RMD and can automatically deposit your money in your bank or transfer it to a nonretirement investment account.
Mobile app. Available for Apple, Android and Kindle devices, you can use the Vanguard app to check your account balance and performance, analyze your portfolio, research funds, read financial news, and buy and sell funds. Once your account has been open for at least 60 days, you can also use the app with the camera on your phone or tablet to make mobile check investments.
Additional Considerations
If you need help setting up an account, selecting investments or need to speak with an account representative, you can call Monday through Friday between 8:00 a.m. and 8:00 p.m. ET. You can also email the company for customer support. The company also offers a variety of searchable online help resources, including articles, FAQs, comparison charts, calculators and online lessons on financial topics such as getting the most out of your retirement plan, estate planning and saving for college.
When we called the company, posing as a small business owner, we spoke with a representative right away. The rep was patient and knowledgeable, asked about our situation and took the time to explain our options and the setup process. He disclosed fees and explained what they are, how to get them waived, and offered tips to minimize the fee until we qualified to have them waived.
Drawbacks
If you want to trade stocks and options rather than invest in ETFs and mutual funds, other brokerages have lower trading fees. As mentioned above, Vanguard doesn’t have physical brokerage offices, so if you prefer to meet with a financial advisor in person, this isn’t the best option for you. Lastly, Vanguard charges an annual account service fee, and you need to have $50,000 in your Vanguard accounts to have the annual maintenance fee waived for the individual 401(k) plan.
Editor’s note: Need an employee retirement plan for your business?Click the Compare Quotes button below to have our vendor partners reach out to you with information.
Staff Writer
Donna Fuscaldo is a senior finance writer at business.com and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Foxbusiness.com. Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining business.com. Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at business.com include business loans, accounting, and retirement benefits.
FAQs
What is the 401k change for 2023? ›
Highlights of changes for 2023
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $22,500, up from $20,500. The limit on annual contributions to an IRA increased to $6,500, up from $6,000.
One reason is that the stock market is going through a down period. Another reason your 401k may have lost money is that you have invested in a specific company or industry that is not doing well. Finally, your 401k may lose money because of fees.
Is Vanguard a good investment for 401k? ›Investment experts caution against paying too much in investment fees because they erode your returns, and even small percentages can impact potential long-term savings. Vanguard's low fund expense ratios make it a popular choice among investors, and Vanguard is our best pick for individual 401(k) plan providers.
How much does Vanguard 401k cost? ›There's no fee to establish an account. We charge $20 a year for each fund held in a Vanguard Individual 401(k) account. We'll waive the fee for all participants in the plan if at least one participant has at least $50,000 in qualifying Vanguard assets.
Will 2023 be better for 401k? ›Bottom Line. In 2023, Americans will be able to contribute more money to their 401(k)s than at any point in the last 30 years. The maximum contribution limit for 401(k)s increases from $20,500 in 2022 to $22,500 in 2023—the highest since 1985.
Will 2023 be a good year for 401k? ›It's anyone's guess whether 401(k) investment returns will rise or fall in 2023. But if a recession happens in 2023, as many economists predict, and high inflation and high interest rates persist, 401(k) plans could suffer losses.
What is the average rate of return on a 401k in 2023? ›Average annual 401(k) return: 4.9%
Many variables determine a 401(k)'s return, including the investments you choose, stock market performance and 401(k) fees.
Reasons Why You Should Not Pause 401(k) Contributions
If you've got a long work life ahead of you, you'll benefit the most from compound interest, which can help your savings grow exponentially. Even just a few years or a few thousand dollars can make a big, big difference later down the line.
Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
What is the most stable 401k investment? ›Lower-risk investment types can help maintain the value of your 401(k), but it is important to consider that lower risk usually means lower returns. Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Which is better for retirement Fidelity or Vanguard? ›
While Fidelity wins out overall, Vanguard is the best option for retirement savers. Its platform offers tools and education focused specifically on retirement planning.
Is Fidelity or Vanguard better for 401k? ›An active trader who likes to sniff out bargains and undervalued sectors will appreciate Fidelity's vast selection. By contrast, a passive investor who merely glances at the annual statement once a year may be better served by the slimmer but cheaper selection of fundamentals offered by Vanguard.
Does Vanguard have a lot of fees? ›*Vanguard average ETF and mutual fund expense ratio: 0.08%. Industry average ETF and mutual fund expense ratio: 0.47%. All averages are asset-weighted.
Which is better Vanguard or Charles Schwab? ›Is Charles Schwab better than Vanguard? After testing 17 of the best online brokers over three months, our analysis finds that Charles Schwab (94.51%) is better than Vanguard (80.25%).
Is Vanguard worth it retirement? ›Vanguard allows investors to trade stocks, bonds, mutual funds, ETFs and options. It's a good selection for retirement investors, but active traders may want more options such as forex and futures trading.
What are the 401k limits and catch-up for 2023? ›The 401(k) contribution limit for 2023 is $22,500 for employee contributions and $66,000 for combined employee and employer contributions. If you're age 50 or older, you're eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000.
Are 401ks up or down in 2023? ›After falling sharply last year, retirement account balances are bouncing back in 2023 — but there are still signs of trouble. Helped in part by improved market conditions, retirement account balances increased in the first half of the year.
What are the new rules for retirement accounts in 2023? ›- The age for taking the mandated annual withdrawals known as required minimum distributions, or RMDs, is raised to 73 from 72 (or 70½ before the original Secure Act in 2020). ...
- The penalty for missed RMDs is reduced from 50% to 25% and even 10% if corrected in a “timely” manner.
After rising substantially from $20,500 in 2022 to $22,500 for 2023, Mercer projects the annual cap to go up just $500 in 2024. That means a new 401(k) contribution limit of $23,000 for 2024, which should still be plenty beneficial for you.