Although SIMPLE IRA's comprise a small part of the employer-provided qualified plan universe
, they are unique in being the sole plan that permits the individual employee to execute in-service trustee-to-trustee exchanges to a fiduciary of the employee's choosing. This transfer right, granted by the IRS
, allows employees to escape high cost (load fund or variable annuity) funded plans for low cost fiduciaries.
The first consideration in the selection of a SIMPLE-IRA fiduciary is to determine the type of SIMPLE IRA an employer has established, either an IRS Form 5304-SIMPLE
or an IRS Form 5305-SIMPLE
* IRS Form 5304-SIMPLE
: this form of SIMPLE IRA permits each employee to choose the financial institution for receiving contributions.
The employer is required to send contributions on behalf of the employee directly to the financial institution of the employee's choice. Most participants are unaware of this option, so the employee should check with the employer to see what form was used to create the plan. Obviously, if the employee has this type of SIMPLE-IRA he can choose Vanguard
as the SIMPLE IRA fiduciary and have all salary deferral and employer matches invested in Vanguard Funds. Vanguard imposes a $25 account fee per fund
(waived if Vanguard assets exceed $100,000) on SIMPLE IRAs. If subject to account fees, employees would be best advised to restrict fund selection
in order to reduce costs. Vanguard's SIMPLE IRA imposes a five fund maximum limit.
* IRS Form 5305-SIMPLE
: this form of SIMPLE IRA requires all contributions to be deposited initially at a designated financial institution of the employer's choosing.
An employee must execute trustee-to-trustee transfers in order to invest with a fiduciary of choice. During the first two years of SIMPLE IRA participation, a transfer can only be made to another SIMPLE IRA. After two years (dated from the first contribution into the plan) transfers can be made into a Traditional IRA.
Using a Traditional IRA avoids the $25 Vanguard SIMPLE IRA account fees. Trustee-to-trustee transfers to Vanguard are executed by: (1) filling out an IRA Transfer Request; (2) including a recent SIMPLE IRA account statement; and (3) having Vanguard execute the transfer. Trustee-to-Trustee transfers do not affect annual contribution limits to personal IRA accounts.
With Form 5305-SIMPLE IRAs an employee should always seek to reduce transfer costs by selecting the lowest cost fund in the employer's plan for accumulating assets for transfer. In the case of load fund SIMPLE IRA's this usually is restricted to a no-load share class of a money market fund. Since on-going salary deferrals and employer matches will continue to be deposited with the employer's fiduciary, avoiding front end loads and back end surrender charges is essential in reducing transfer costs.
There are no limits as to the number and frequency of trustee-to-trustee transfers an employee can execute (if an employee receives plan assets directly, the assets must be "rolled-over" to a new SIMPLE IRA within 60 days. One is limited to only one such rollover per year. One should always make sure that the institution receiving the transfer handles the transaction directly.)
It is always a good idea to check about transfer requirements with both the new fiduciary and the employer fiduciary prior to executing an exchange since forms and transfer procedures can change over time.
Additional administrative tasks: Financial Page affiliate blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.