Creating Lazy Portfolio in 401(k) Plan

[jcnelsn1]

All,

Thanks in advance for any help. I am interested in creating a 3 or 4 fund balanced portfolio in my 401(k) and pension plan at work. My company contributes 7% of my pay to the pension plan and 3% to the 401(k). I contribute the maximum to the 401(k). I am in my early 30s. Investment options are the same in both the pension plan and 401(k).

Here are my choices:

Oppenheimer Developing Markets Fund Class Y Oppenheimer Funds ODVYX 1.00
Franklin Gold and Precious Metals Fund Class Advisor Franklin Templeton Investments FGADX .66
Vanguard GNMA Fund Class Admiral Vanguard Funds .11
PIMCO Total Return Institutional Shares PIMCO PTTRX .46
MFS INTL NEW DISC FIBT MWNIX 1.14
Oakmark International Fund Class I Oakmark Funds OAKIX 1.06
Vanguard 500 Index Fund Signal Shares Vanguard Funds VIFSX .05
T.Rowe Price Growth Stock T. Rowe Price Funds PRGFX .70
Vanguard Prime Cap Vanguard Funds VPMCX .45
MFS Value Fund Class I MFS Funds MEIIX .69
Vanguard Windsor II Vanguard Funds VWNFX .35
Vanguard Long Term Bond Index Vanguard Funds VBLTX .22
Perkins Mid Cap Value Fund Class T Janus Funds JMCVX 1.00
Federated U.S. Government Securities: 2-5 Year Trust Class Inst Federated Funds FIGTX .59
American Century Equity Growth FIBT .69
Fidelity Advisor Technology FIBT FATIX .86
FIDELITY NATURAL RESCOURCES FIBT FNARX .84
FMI Common Stock FIBT FMIMX 1.21
ICM SMALL COMPANY FIBT ICSCX .92
LEGG MASON VALUE TR FIBT LMNVX .77
Vanguard Capital Opportunity FIBT VHCAX .41
Vanguard Short Term Invmnt FIBT VFSUX .11
Weitz Value Fund FIBT WVALX 1.20
Fidelity Prime Port FIDXX .20
Cohen & Steers Realty Shares Cohen & Steers Funds CSRSX 1.03
Vanguard Short-Term Bond Index Fund (Inv Vanguard Funds VBISX .22
Vanguard Small Cap Growth Index Signal Shares Vanguard Funds VISGX .24
Janus Global Select Fund Class T Janus Funds JORNX .96

Any suggestions on 3 or 4 funds out of those options to create a balanced portfolio? (right now all of it basically is in the S&P index fund) I am thinking I need Total US Stock Markert (the S&P Index fund + ???), Total International (?), Total Bond (VBISX, VBLTX + ?) and some REIT/Commodity exposure (CSRSX (expenses seem kind of high)? + ?). We can assume that the bulk of my money will be in my 2 work retirement accounts. I am planning on creating a backdoor Roth this year (I am ineligible to make ROTH contributions and contributions to IRA will be non-deductible) and will have some cash to put in a taxable account as well, but those amounts will be a small part of overall picture (maybe 10-15% of total) and from year to year I cannot count on having signficant amounts to contribute to those accounts going forward.

Here is additional info per request below:

Emergency Savings: Yes - ~5 months
Debt - student loan (mid 5 figures) (<3%); mortgage on a rental house I own (was my residence then moved out of state) (second mortgage (lowish 5 figures) at 8.5%, first at 6%). Refi not an option at this point I also own a partnership interest in in a real estate partnership owning commercial property leased by my work (0 equity, debt of mid 5 figures at 5%). Nominal car loan to be paid off at year end. I rent the place we live in. Plan on buying a home in spring 2014. . Not currently saving for downpayment. Expect to fund that with year end money next year.
Tax- married filing jointly. Wife does not work outside home. 33%bracket this year (may be as low as 25% in some years). State say 5%
Age - early 30s
Desired AA 70/30, 30% of stock in Int

Current retirement:

Work 401(k) and Pension (a self directed defined contribution plan). Basically all in S&P index fund. Work contributes 10% of pay combined. Balance is less than what it should be (<$100k) but I am now in a position to start righting the ship!
No accounts In wife's name

End of year I plan on likely paying off second mortgage ( I figure that is guaranteed 8.5% return and it will improve cash flow from the rental), funding back door Roth for wife and I. Will have lowish 5 figures available for investing in taxable account. All of the foregoing plans not set in stone. I am also considering an alternate investment with some or all of the money I would otherwise use for the foregoing (multifamily housing)

Future contributions:
Work 401(k) - I will make max contribution plus 10% of pay from employer
Less certain on other contributions. Hopefully $1,000 per month to a taxable account plus potentially larger sum at year end to do another backdoor roth and make additional taxable contributions, but that is variable and I cannot count on it.


Thanks

[hoppy08520]

If you want a fully balanced portfolio, covering all these asset classes, it's going to be hard to do that in just 3 or 4 funds.

Can you include the expense ratios for these funds? Be sure to enter the expense ratios for the funds as they are in your company's specific plan; often the fund expense ratios in 401k/403b/457 plans are different from the "retail" expense ratios you will find for a fund when doing an internet search.

Bonds
For bonds, if you really want a total bond component, you might need to mix and match. But the problem with the bond fund choices is I don't see an intermediate term bond fund. You have several choices for short term and long term (including the GNMA fund) but then you've got a gap in the middle.

With that in mind, in your position I might just choose PIMCO Total Return Institutional Shares PIMCO PTTRX which is a balanced bond fund, if I wanted just one fund.

If you don't want PIMCO, then I might consider:
60% - Vanguard Short-Term Bond Index Fund (Inv Vanguard Funds VBISX
20% - Vanguard Long Term Bond Index Vanguard Funds VBLTX
20% - Vanguard GNMA Fund Class Admiral Vanguard Funds

US Stocks
To balance out your 500 index fund with mid-cap and small-cap stocks, maybe these two. Refer to Approximating Total Stock Market for guidance on the ratios if you want to assemble a proxy for a total US stock market index fund.
FMI Common Stock FIBT FMIMX - this is a mid-cap value/blend fund.
ICM SMALL COMPANY FIBT ICSCX - this is a US small-cap value/blend fund.

International
I see only two international funds:
MFS INTL NEW DISC FIBT MWNIX
Oakmark International Fund Class I Oakmark Funds OAKIX

MWNIX seems to track the Vanguard Total International Stock Market Index Fund (VTIAX) returns rather closely. It has more of a mid-cap tilt and a slight growth tilt. Has developed and emerging markets.

OAKIX is a large-cap developed markets fund.

If I had to choose just one, I think I'd pick MWNIX because it has a broader portfolio. But I might want some OAKIX to have less of a mid/small tilt.

If you can get a bigger balance in your IRA, then hold Vanguard TISM in IRA so you don't have to use the international funds in your work accounts (which tend to have higher expense ratios and fewer options).

[jcnelsn1]

Thank you (the link to the site shwoing how to approximate Vanguard total stock is helpful). I added the "net expense ratio" for each of the funds to my post above.

I guess what I am hoping to do is to replicate to the extent possible Vanguard Total Bond (VBMFX), Vanguard Total Stock Market (VTSMX), Vanguard Total International Stock (VGTSX) and Vanguard REIT Index (VGSIX) with the funds available to me at the lowest cost and with the least number of funds. Once again, all help is greatly appreciated. I am also wondering if I should throw in the Fidelity Natural Resources or Franklin Gold and Precious Metals funds into the mix for exposure (indirect maybe) to commodities. If what I want to do is not really possible (or very expensive) with the funds available, I can try to balance things out in a Roth (currently thinking VGSIX in the Roth?) and a taxable account (currently thinking VGTSX in the taxable account?) , but my ability to contribute to those in the future is hard to predict (depends on year end "bonus" money). This year I will probably fully fund a backdoor Roth for my wife and I and put a decent chunk in a taxable account, but next year I may or may not be able to contribute much outside of the work accounts when it comes time to rebalance the total portfolio.

[hoppy08520]

Your 401(k) plan is typical of many: you have some great options in a few asset classes (US large-cap and some bond sectors), and some dogs in others (international and US mid-cap and small-cap).

In these cases, you try to arrange it so you can use the money in your 401(k) plan in the good funds, and compensate in your other accounts (IRA, taxable, spouse) for the asset classes that aren't so good in your 401(k). What's important is for your overall portfolio, across all accounts, to reflect your desired asset allocation and investment strategy.

You mention your wife. Does she have any retirement accounts? Do you have any other accounts?

Looking at your expense ratios, the US mid-cap fund is so expensive (FMI Common Stock FIBT FMIMX 1.21), that I'd consider leaving it out and just putting more in the 500 index fund (0.05%). That mid-cap fund would need to out-perform the 500 index by 1.16% just to stay even. The small cap fund at 0.92% isn't much better.

If you have money in other accounts, then you can try to balance things to hold these in your 401(k):

Vanguard 500 Index Fund Signal Shares Vanguard Funds VIFSX .05
PIMCO Total Return Institutional Shares PIMCO PTTRX .46

and in your other accounts, hold international and extended market (US mid-cap and small-cap), plus other asset classes if desired (REIT and gold) at the overall levels you desire.

[telemark]

Clearly the plan administrator is not a Boglehead. I'm sorry, but with those funds a fully diversified portfolio is going to be both complicated and relatively expensive. The good news is that a simple combination of VIFSX and VBISX is likely to be not that much worse than the three-fund portfolio. Diversification is a good thing, but not worth paying too much for.

I would start by making a spreadsheet that lets you see the expense ratio of the total portfolio as a weighted average. Start with those two funds and then mix in small amounts of the other asset classes and see what it does to the overall expense ratio. You'll have to find some balance that is acceptable to you. The other good news is that diversification is most effective in small amounts.

Things are better on the bond side. Either Pimco Total Return or a suitably weighted combination of VBISX+VBLTX are perfectly good choices.

[telemark]

One specific comment on the Franklin gold fund, FGADX. That exact fund is in my 401K plan at work. We had our annual 401k review last week, and the advisor took pains to explain that it's a fund that invests in mining stocks, not one that actually holds gold bullion. That was by way of explaining why it's down 15% YTD. It does well in some years, but doesn't correlate well with actually holding gold.

[retiredjg]

Welcome to the forum!

You are trying to put together an ideal pre-decided portfolio, but you don't have the right building blocks available. So your best approach is to pick the 2 best funds in the 401k and hold the rest outside the 401k (understanding that REIT will fall by the wayside, at least for now). That would be hoppy's suggestion of using the 500 Index and Pimco Total Return in the 401k and building the rest of your portfolio around that. Or maybe some mixed kind of alternative for the bonds.

In order to help you do that, we need to know just what you and your spouse have now. Are there any IRAs? Roth IRAs? Money in a taxable account that is set aside for retirement? We also need to know your tax bracket and some other stuff. Please see the link below called Asking Portfolio Questions for how to ask that kind of question. With more information, a lot more help could be offered.

[jcnelsn1]

Welcome to the forum!


In order to help you do that, we need to know just what you and your spouse have now. Are there any IRAs? Roth IRAs? Money in a taxable account that is set aside for retirement? We also need to know your tax bracket and some other stuff. Please see the link below called Asking Portfolio Questions for how to ask that kind of question. With more information, a lot more help could be offered.

Thanks. I looked at the link and added additional info above. Really appreciate all of the thoutful replies so far.

[thebogledude]

are you open to holding international in your taxable account?

since you are not eligible for ira, it is tax efficient, take advantage of foreign tax credit and can do tax loss harvesting.

I also agree with the other posters on

Vanguard 500 Index Fund Signal Shares Vanguard Funds VIFSX .05
PIMCO Total Return Institutional Shares PIMCO PTTRX .46

[jcnelsn1]

I have no issue holding international in a taxable account.

Not to get off topic, but..... Does a plan sponsor usually have a say in what funds are available or is that limited by the plan administrator? In other words, could my work add better low cost index funds if it wants to? If so, that would obviously solve my problem if I could convince them to add them. I cannot see what te downside to an employer would be to adding funds?

[retiredjg]

jcnelsn1, you have not given us much to work with, but I'll give it a shot. Here is what I think you plan to have by the end of this month. However, apparently you have not made up your mind and some of this money below might be going into another real estate venture.

Taxable "lowish 5 figures" so I'll guess at $3k

401k and Pension "less than $100k so I'll guess at $90k

His Roth IRA $5k

Her Roth IRA $5k

Total guess at your portfolio = $103k


Here is a possible way to set this up that will be tax efficient and and low cost.

Taxable 2.9% $3k
2.9% Vanguard Total International Index

401k and Pension 87.4% $90k
62.4% Vanguard 500 Index Fund Signal Shares Vanguard Funds VIFSX .05
25% PIMCO Total Return Institutional Shares PIMCO PTTRX .46 (or combine with the GNMA fund)

His Roth IRA 4.9% $5k
4.9% Vanguard Total International Index

Her Roth IRA 4.9% $5k
4.9% Vanguard Total International Index

This portfolio is 75% stocks, 25% bonds, with 17% of stocks (12.7% of portfolio) in international. Right now, the international is low, but that will be fixed (or near fixed) with next year's contributions.

An alternative is to use both the 500 Index (50%) and the Vanguard Small Cap Growth (12.4%) in your 401k to get closer to Total Stock Market. I'm not a fan of SCG, but it certainly is not poison and you should use it if you want.

For contributions, you said you might contribute this:

Taxable: $12k <--all to international unless it goes too high, then some to total stock market
401k and pension: $17,500 plus an unspecified amount which I'll guess at $20k for a total of $37.5k <--$14.9 to bonds, rest to US stocks
His IRA/Roth IRA $5k <--all to international
Her IRA/Roth IRA $5k <--all to international

This is kind of a rough and dirty idea because you have not been very precise with your information. Perhaps you didn't know that it matters. Or perhaps you just approach financial matters in a not very precise manner.

I'm not sure, but I get the feeling that you are running a little fast and furious with your money. I get the feeling that you are doing more in the realm of speculation and and less in the realm of investing. This could be an entirely unfair conclusion on my part, but I would be less than honest to make a suggestion without at least bringing this up for you to consider. Investing takes a bit of a plan and I'm not sure you actually have one.

There are several things that might be concerning. For example, rather than save for a house downpayment, you believe you can simply save that with next year's year end money. However, it appears you also sort of committed that same money to your taxable account and your IRAs for next year. And can you really get a downpayment with your year end money? Maybe in some communities, but probably not most.

You seem to be involved in some real estate ventures. There is nothing inherently wrong with this, but you need to have your retirement savings solid first. I'm not saying that your real estate won't provide a great benefit in retirement, but it is more speculative than a solid 401k and IRAs. If things don't work out like you hope, you might be eating cat food. I wonder if you need to pay attention to your retirement accounts a little more and your real estate a little less.

The fact that you are involved in a real estate partnership that owns the building that your company leases is a bit worrisome. If your business folds, are there other tenants that will support your partnership or does your partnership lose all of its income at the same time you lose your salary? This could be an example of putting two different eggs in the same basket when it would be much safer to put the eggs in different baskets.

And lastly, your debt is high and your interest rates are rediculous. You are absolutely right to plan to pay off the 8.5% second mortgage. But you should be applying this same theory to your other loans as well. Your debt load needs to be much lower before you consider this next multifamily housing venture.

Here's what you probably need to do. 1) Get rid of much of that debt - the interest rates are sucking you dry. 2) Decide on a reasonable amount to save for retirement. Don't let this be dependent on other things like real estate. This needs to be done first. 3) Save for and buy a house to live in - something that is within your means, not above your means. 4) Consider if you want to save for college for kids (if any) or if this will be something that real estate gains might pay for. However, be realistic or your kids might not get to go to college. 5) Once you are stable and can actually afford it, get into future real estate ventures if you are still interested.

[retiredjg]

Not to get off topic, but..... Does a plan sponsor usually have a say in what funds are available or is that limited by the plan administrator? In other words, could my work add better low cost index funds if it wants to? If so, that would obviously solve my problem if I could convince them to add them. I cannot see what te downside to an employer would be to adding funds?

The plan is a contract. The employer might be able to get something added. Might not. Depends on what the contract says.

However, there are several low cost funds that can be used. I'd be surprised if much change will happen, but it would not hurt you to ask. The weak spot is your international choices - they are higher cost than I'd want to pay. You might ask if they can get Vanguard's Total International Index. That would be an improvement.

[jcnelsn1]

Retiredjg. Thanks for the suggestions, much appreciated. I will give you more info. I am not intending to just dribble information out, I guess I was initially nervous about providing too much info online. My apologies.

I can see where you have some assumptions about my real estate investments, but they are explainable (to me at least). After school, my wife and I purchased a home with zero down. In hindsight, probably not the best idea, but we did not intend to move and the cost was modest and well within our means (maybe 150% of my annual income at the time). I then decided to move for a new opportunity during the housing bust. I had a choice to make. Sell the house and write a $15,000 or $20,000 check at closing (which I didn't have, so not really a choice) or rent it out. It has marginal positive cash flow (depending on what repairs are needed in a given year, etc.), but does provide a tax loss. The market really hasn't improved so if I sell now I will still be writing a check at closing. When I pay off the second, it will cash flow positive around $400 per month, 20% of which I will be setting aside for a repair/replacement reserve. I figure when my kids are starting college the house will be paid off and I will have a decent asset to liquidate if needed. I realize there may be periods of vacancy, but the rental market where the house is located is pretty good. It has only been vacant 1 month since I moved 4 years ago and I can afford a month of vacancy here or there.

As far as my real estate partnership interest, I am a shareholder in a professional services business. All of the shareholders are required to be partners in a separate building partnership that owns the office buildings occupied by our professional services business. The partnership lends new partners the required equity contribution and it is repaid from deductions from the monthly distributions from the real estate partnership. Obviosuly there is risk in this deal (if our business collapses I agree we are in trouble from both ends and I am a guarantor on partnership debt, etc.), but those risks come from owning a business and I am okay with them.

As far as a house downpayment, yes I believe I will be able to fund that from year end money at the end of next year and still have money to max out backdoor roth contributions for my wife and I. In several places I have mentioned my compensation is variable, but I am fairly confident on predicting it a year out.

As for my plan, I have one (maybe it needs improvement?):

Save a minimum of 25% of my gross income (including anticipated bonuses) for retirement. After I contribute the max to my 401(k), a 10% contribution from my employer and maxing out a Roth for my wife and I, I will need to save approximately another $900 a month in a taxable retirement account to meet that goal.

The main variable for me is that I receive a significant portion of my annual income in a year end bonus. Some years it may be 100, 150, 200% or more of my salary, some years it may be nothing (I do not expect that, but you never know). I can max out my 401(k) and make the $900/month contribution to a taxable retirement account out of my normal salary. I intend to save 80% of any bonus, split between retirement (40% of the bonus) (it would be a bad year where that was not sufficient to at least fund the Roths) and 40% for other longer term savings goals (e.g., replacement car) or possible alternate investments (e.g., the multifamily housing project I mentioned). 20% of the bonus I will spend (take the family on a nice vacation, etc.). Under this plan I should be saving 25% of gross income for retirement every year as a minimum (substantially more in many years ) and with total savings in many years of 50% or more of my gross income. The goal is optimistic, but I have a budget and I think it is attainable. Basically I will live off my normal salary and make pretty good retirement savings contributions from that salary and use any bonuses to really juice up savings for retirement, other savings and for other investments (and to make some splurges too). I am open to suggestions, as that is why I am sking questions.

You indicated you thought I should be more focused on paying down debt. I am interested in hearing your thoughts further. Which debt do you think I should focus on before other savings? All of it? In your opinion, should I be paying down debt before making contributions to my taxable retirement account and other savings or just before getting into something more speculative like an apartment complex? The student loan interest rate is very low. For my real estate partnrship, I have a dedicated stream of distributions that will pay off the debt in 5 years, while still providing enough income to pay my income tax liability on the distributions with some additional cash left over every year. It is obvious to me that paying off the 8.5% second mortgage on my rental ASAP makes sense. Paying off early the first mortgage on the rental (I checked again and the rate is 5.4%), my student loan and my real estate partnership loan is not as clear to me.

Thanks

[retiredjg]

Thanks for the update. Now you actually sound like a person who has given this a lot of thought. That person did not "come through" in the earlier post and I was concerned. So I take back the "fast and furious" comment - it no longer seems to apply.

Your overall plan actually sounds pretty good. It is particularly good that you have a goal for how much to save for retirement. It had sounded to me like your retirement was getting the leftovers.

I have a comment and my thoughts on your questions.

Comment - it sounds like you might be thinking of putting money into a taxable account before the Roth accounts. This is backwards. Roth pretty much trumps taxable in every situation I can think of. First, you save in taxes each year (no capital gains or dividends to pay tax on). Second, the earnings grow tax free (instead of under the promise of a capital gains tax. Third (and what you probably have in mind) the money can be easily available to use if you need it. I can come back to this later if that is a concern for you.

You indicated you thought I should be more focused on paying down debt. I am interested in hearing your thoughts further. Which debt do you think I should focus on before other savings? All of it?

You already know the 8.5% loan is nuts and plan to handle that one first. That's good. And you already plan to pay off the car loan in the next couple of weeks. That's good too.

After that, it would depend on what type of tax deduction you get from the interest on each loan. For example, the 3% student loan seems lowest cost, but it probably is not tax-deductible. I don't know what type of deduction you might be getting on the 5.4% loan and the 5% loan. And I don't know the amount of the first mortgage. But it is possible that the student loan and the partnership loan are draining your savings about the same amount. These are things you need to look at to help you decide the order.

- second mortgage on rental house (lowish 5 figures) at 8.5%
- Nominal car loan to be paid off at year end

- first mortgage on rental house at 5.4%
- partnership interest mid 5 figures at 5%
- student loan (mid 5 figures) (<3%)

But not knowing much, I'd guess that the 5.4% loan is the one I would be paying extra on (under the concept of working from highest interest to lowest) once the 8.5% and car loan are gone.

In your opinion, should I be paying down debt before making contributions to my taxable retirement account

Yes.

For my real estate partnrship, I have a dedicated stream of distributions that will pay off the debt in 5 years, while still providing enough income to pay my income tax liability on the distributions with some additional cash left over every year.

Hmmm. This also puts a different light on your situation. I'll just assume there is a reason not to pay it off now.

However, since there is cash left over every year in this stream of distributions, why not apply that cash to the other loans? It would be good to get some of this debt out of the way before applying for a mortgage or thinking about the multi-family real estate venture.

[jcnelsn1]

Well i hope to implement my plan and these suggestions next week. Thanks for the help.

[Sunny Sarkar]

Hi,

I'd look at the whole portfolio *including Roth & Rollover IRAs* instead of looking at the 401k only. This way you can take the best of your 401k fund choices (which are better than average - I once had a 401k containing only a single index fund with an ER of 2.11%), and choose the other desired funds in the IRAs to build a lazy portfolio across all your accounts.

Here's an example:
401k - Vanguard 500 index (very good surrogate for TSM)
401k - Vanguard Short Term Bond index (good enough surrogate for TBM)
Roth - Vanguard Total International Stock index

For another example, you can take a look at my lazy portfolio.

Hope that helps.

All the best,
Sunny

[jcnelsn1]

Well I think I pretty much got this all straightened out. I moved everything in my 401(k)/pension to the S&P Index fund and the PIMCO bond fund. I opened an IRA for myself and funded it for 2012 and 2013 and an IRA for my wife. That money is currently set to go in the prime money market fund, but when the transfer goes through I plan to do the backdoor Roth conversion and move it all to Total International. I also opened a taxable account and put all of that money in Total International and set up an automatic monthly investment plan for that account. I am paying off the small balance on my car loan tomorrow. I have enough to pay off the second mortgage on my rental, but I am going to mull that over a bit more. I know from a pure dollars and cents perspective I should, but there is a strong part of me that wants to hang on to the extra cash for awhile for piece of mind. Thanks again for everyones help. I feel like I am on the right track now, which is a good feeling.

[retiredjg]

It sounds like you are headed in the right direction. While you are feeling good and smart about all of this, you should write down your plan. Also write down what you plan to do when all heck breaks loose. That will keep you from doing stupid stuff when the next crash comes. Just look at your plan and follow the course you set when times were good and your brain was not reeling.

In the Wiki there is an example of an IPS (investment policy statement). It will give you good ideas on what to include in your plan. However, your plan does not have to be that all-inclusive. Make it to suit your own needs. But be sure you put something to paper or you will find yourself making and re-making the same decisions over and over, sometimes when calmer heads are not prevailing.