Guzzo the Contrarian

I just added another personal contribution into my Vanguard 529-Plan. But, it wasn’t because I really wanted to contribute. Let me explain.

I originally started my 529-Plan about 5-6 years ago with an initial minimum $250.00 contribution in the Nevada Upromise College Fund 529-Plan, in order to take advantage of the Upromise rewards program. Over the years, the contributions that I’ve received from Upromise rewards program have really added up, far more than my original contribution.

But, I grew tired of coughing up the $20.00 Upromise College Fund annual account maintenance fee every year, so I contacted The Vanguard Group last year about transferring my assets into the same Nevada-sponsored Vanguard 529-Plan.

Since I was a Voyager client, I thought that Vanguard would cut me some slack and allow me to transfer my plan without meeting the $3000.00 minimum. But, after speaking with a representative, I was told that I’d have to meet the minimum in order to avoid the $20.00 low balance fee. So, I directly transferred my assets and sent in a personal check which together totaled over $3000.00.

Everything seemed to be going fine until this year when I noticed a $20.00 fee charged to my account. I’ve mistakenly been charged fees in the past which Vanguard promptly corrected. So, I called Vanguard to point out this errant charge and asked them to reverse it. This time, I was told by a representative that they wouldn’t reverse the fee because I hadn’t reached the minimum contribution. What??

Now, see if you can figure this one out. According to the Vanguard 529-Plan materials and website:

The minimum initial investment for The Vanguard 529 College Savings Plan is $3,000, and the minimum additional investment is $50. Once established, there is a $20 annual maintenance fee on balances less than $3,000 per 529 account.

Am I not reading this correctly? Well, it seems as though what Vanguard writes, and what Vanguard means are two different things.

I explained that Vanguard wouldn’t allow me to open an account unless I contributed the minimum $3000.00 required, and that my balance never dropped below $3000.00. But, according to what I was told, they consider a minimum initial investment the same as a minimum initial contribution, and I didn’t contribute the minimum required.

I know, I know, that sounds like the same thing to me too. But, Vanguard considers the minimum initial investment to be a minimum cash investment. It seems as though any transferred earnings aren’t included in determining the $3000.00 minimum balance.

According to an email response from Vanguard:

Under IRS rules, a 529 contribution is after-tax money that has been deposited into a qualified tuition program (529 plan); any earnings derived from the contributions are federally tax-deferred as long as the account owner complies with Section 529 guidelines.

As you know, rollover or transferred-in assets generally contain both completed 529 contributions (principal), which are made with after-tax money, along with any accumulated earnings. Because these earnings are federally tax-deferred profits under Section 529, they are not included in your account contribution (principal) totals–even though they are a part of your account balance.

The Vanguard 529 Plan low-balance fee is applied on all accounts with 529 contribution (principal) amounts under the required initial investment $3,000. This principal amount may include after-tax contributions made under a different 529 plan and then moved to The Vanguard Plan, but not the accumulated earnings.

Of course, I argued semantics and Vanguard eventually reversed the fee. But, only with the condition that I personally contribute the full $3000.00 before the next time this low balance fee is assessed.

To their credit, Vanguard did write that “we will certainly take your comments concerning the presentation of this fee under consideration when we next update our plan materials. As we’ve expressed in our earlier communications to you, we do value all client feedback on the plan”.

But, until Vanguard clarifies this fee in their plan description, I thought I would present my experiences in order to alert others investors finding themselves in similar circumstances.