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Why doesn't Vanguard allow to pay fees pertaining to 401(k) accounts using resources located outside the 401(k) accounts? Is that due to some law, some other constraint, or is that just some arbitrary decision from Vanguard?

It seems counterproductive for both the client and Vanguard, as the client loses money on a tax-favored account (401(k)) and Vanguard has a lesser amount of money to manage. Example of fees: paying for the Self-Directed Brokerage Option (SDBO).

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    For IRAs with low balances (< $10K as I recall), Vanguard charges (or maybe used to charge) an account maintenance fee of $20 or $25 per year for each fund that the IRA was invested in, and the IRA account owner had the option of paying this fee by check or having Vanguard deduct it from each mutual fund balance. This external fee payment was not considered to be an additional contribution to the IRA. Remember that in the "good old days" being talked about here, the annual IRA contribution limit was $2K, and so Vanguard had lots of IRA mutual fund accounts with balances below $10K.
    – Dilip Sarwate
    Feb 23 '19 at 16:58
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Why doesn't Vanguard allow to pay fees pertaining to 401(k) accounts using resources located outside the 401(k) accounts?

Lets assume for a moment that the law would allow external funds being used to pay account fees.

The 401K company would see it as an added expense, and not want what you propose.

Shortly after each payday for your company the 401K service provider receives an electronic transfer of a sum of money and a data file explaining how the money is to be split among the employees. The service provider's computer then allocates the money to each investment choice previously designated by each employee.

Now imagine that they need to bill each employee and accept payment. Each employee could send a check. If each account was charged a flat fee that would still result in an extra transaction per customer. It would be even harder if the fee was based on the size of their account. Each bill would have to be generated, and sent to each customer. Then consider the case of people who forget to pay, and have to have second notices sent to them.

What would happen if somebody never sent in their check for the fee? The service provider would eventually pull the money out of the account. they wouldn't close their account.

Note that this same thing is done with health savings accounts, and I imagine 529 plans. The money used to administer the plan is pulled from either the plan balance, or the service provider gets their fee by holding down investment returns. I know that with the HSAs the money pulled from account is specifically mentioned as being an allowed expenditure that is non-medical but doesn't trigger taxes and penalties.

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    Is there a legal element to it? Seems plausible that paying fees associated with a tax-advantaged account would be considered equivalent to making a contribution to the account.
    – glibdud
    Feb 23 '19 at 14:13
  • if " paying fees associated with a tax-advantaged account would be considered equivalent to making a contribution to the account" would the limit be $19,000 or 19,000 + fees. If it didn't change then you would still be in the same place.
    – mhoran_psprep
    Feb 23 '19 at 21:36
  • The limit is $19,000. My question is whether the laws that define the 401k require that any fees associated with the account count toward that $19,000, or if it is just as you say, a convenience for the providers.
    – glibdud
    Feb 23 '19 at 21:45
  • Fees are be unrelated to the amount contributed this year. If my answer doesn't answer your new question, then ask a new question.
    – mhoran_psprep
    Feb 23 '19 at 22:59
  • Are you sure, though? As I said, it's plausible that the laws defining 401k accounts require that fees are drawn from money that's already been contributed to the account.
    – glibdud
    Feb 23 '19 at 23:02

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