Do you complicate your portfolio to lower expense ratios?

[C4NT]

I know I may have to post specific portfolio information for better advice, but I just wanted to get a rough consensus on whether to think about changing my wife's portfolio.

Here is the breakdown:

She just switched jobs, so the majority (~99%) of her portfolio just got rolled over to Vanguard in both a ROTH and IRA. Her new place of employment has a generous match of 125% of the first 6% - which we are going to take advantage. Her AA is essentially age in bonds with 3% REIT replacing some bonds. We like lazy portfolios, so her funds are all in just four funds: Total Stock - VTSAX, Total International - VTMGX, Total Bond - VBTLX, and REIT Index - VGSLX.

The 401k is through Charles Schwaab and has a very limited number of choices (unless you pay $100 annually for wider selection - which we won't do until account grows large enough to make sense). She is currently putting her contributions into a target fund which has an ER of 0.45% (not bad, but not great). There are couple of funds with lower ERs (0.15-0.30), but they are more specific, i.e., large cap/small cap type of funds.

So my question is...Would you switch 401k funds and complicate her Vanguard holdings to keep AA in line with IPS to chase lower ERs? Do you do this type of thing in your portfolio? (for poll)

I am leaning on no, just stick with target fund mainly because I am lazy. However, if it is worth it I will put in the work (I'm not that lazy).

Thanks.

[retiredjg]

Are you asking if she should use a target fund in her 401k (at .4%) instead of the 4 Vanguard funds listed?

[C4NT]

Are you asking if she should use a target fund in her 401k (at .4%) instead of the 4 Vanguard funds listed?

No, the four vanguard funds are in her IRA. Her 401k does not offer these funds, but does offer lower ER funds (but more specific) than the target fund. So, I could choose a large cap fund with a lower ER, but that would necessitate the changing of funds in her Vangaurd account (IRA) to meet AA demands and to accommodate the large cap stocks.

Hope that clears that up.

[livesoft]

I suppose that she will have a small percentage of the total family portfolio in her brand new (to her) 401(k) account because she is just starting to contribute to it. In this case, I would recommend just keeping that account simple and use only one fund. It doesn't matter whether it is a target retirement or balanced or lifecycle fund or a single asset class fund such as S&P500 index.

So I see that you all can probably not complicate things and have lower expense ratios if you want. When her 401(k) account has a larger value, then revisit the question.

[retiredjg]

It depends on things not shown.

-If the difference in ER is big - yes I'd "complicate" and avoid the target fund. This is frequently the case if the target fund is the Fidelity Freedom Fund series. But notice that this might mean less complexity somewhere else.

-If the difference in the ER is not big, I might use the target retirement type fund, but it depends on what the whole picture looks like.

-If there is a taxable account (set aside for retirement), I probably would not use a target type fund in the 401k.

[C4NT]

Thanks to all for comments and votes.

As livvesoft and retiredjg pointed out it does depend on the size of the funds as well as the difference in ERs. Right now I we are going to stick with the target fund with the 0.45 % ER. Once the account grows we will put in the work to think about where else we could contribute to minimize ER.

[Sunny Sarkar]

Do you complicate your portfolio to lower expense ratios?

Yes. Almost all my retirement assets are in tax-sheltered retirement accounts, and instead of simply owning a Life Strategy or TRF fund, I own the components in order to get the admiral shares. It don't bother me though - since the laws make me have more accounts than I have funds.

[archbish99]

Particularly when the 401k is a relatively small portion of your portfolio, just pick whatever's really low in the 401k and build around it in the other accounts. Likely, this looks like putting the 401k entirely in a really cheap S&P500 fund and putting a corresponding amount of Extended Market in the IRA. These two together are equivalent to TSM.

In my 401k, I hold VIIIX (S&P 500, 0.02% ER) plus VXF as an ETF, since the composite ER is less than VTI. You could probably do the same, except that you'll hold the Extended Market in a different account.

[bottlecap]

I do, but might not if it would complicate things too much.

JT

[Default User BR]

I'll complicate it for almost any reason. I think complexity is the least important factor. I will only consider that if everything else is equal. I increased complexity to get brokerage bonuses. In this day, with the tools at our disposal, the complexity matters very little. A good aggregating spreadsheet takes care of things.


Brian

[JW Nearly Retired]

So my question is...Would you switch 401k funds and complicate her Vanguard holdings to keep AA in line with IPS to chase lower ERs? Do you do this type of thing in your portfolio? (for poll)

A 0.10% ER versus a 0.45% ER is certainly worth a little complexity once you have a fairly sizable 401k. It would save you $700/yr on $200k. When the 401k is a small one then the contributions are dominating it's growth so the ER doesn't have much effect. You could choose the simplest approach for the time being.

On the other hand, no time like the present to start paying attention to low cost investing details. 401k choices seem to have massive inertia for many investors. She may keep this same target fund until she retires.
JW

[dickenjb]

If she has a cheap S&P 500 fund at 0.1% ER I would buy that in the 401(k) and treat it as equivalent to VTSAX. When balance gets large, might balance with "completer index" at Vanguard.

I answered yes to the poll.

As others have pointed out, not really important until 401(k) balance is large but why not set it up right from the beginning?

[bertilak]

I did just the opposite -- accepted a slightly higher ER to simplify the portfolio. Thinking ahead to make things manageable by beneficiary.

[dbr]

Historically I have simplified my portfolio to get lower costs.

A somewhat ironic example is going to the brokerage link in the 401K (complication? -- not really) to buy a simple portfolio of Vanguard funds.

[dianna]

I've thought a lot about your question over the past 2 days. Our portfolio is much more simple and elegant than it used to be. I haven't complicated it based on ER's, but I do believe it is complicated (perhaps more than it needs to be, perhaps not) to try to make the holdings in the most ideal "space" (Tradition vs Roth vs Taxable), and this was done because we don't have enough space in any one of those buckets to complete our AA.

As I reviewed the portfolio today (for EOM January totals), I found myself looking for ways to streamline. Thank you for your question, as it has a (hopefully) positive influence for us.

[Default User BR]

I've thought a lot about your question over the past 2 days. Our portfolio is much more simple and elegant than it used to be. I haven't complicated it based on ER's, but I do believe it is complicated (perhaps more than it needs to be, perhaps not) to try to make the holdings in the most ideal "space" (Tradition vs Roth vs Taxable), and this was done because we don't have enough space in any one of those buckets to complete our AA.

Are finding it difficult to analyze or manage your holdings? If so, then you are probably not using the right tools. If not, then why would you care about the complexity?


Brian

[Aptenodytes]

Normally the opposite holds.. The range of available funds shrinks as you constrain ERs, so lowering ERs usually goes hand in hand with simplification.

[dianna]

I've thought a lot about your question over the past 2 days. Our portfolio is much more simple and elegant than it used to be. I haven't complicated it based on ER's, but I do believe it is complicated (perhaps more than it needs to be, perhaps not) to try to make the holdings in the most ideal "space" (Tradition vs Roth vs Taxable), and this was done because we don't have enough space in any one of those buckets to complete our AA.

Are finding it difficult to analyze or manage your holdings? If so, then you are probably not using the right tools. If not, then why would you care about the complexity?


Brian

Good question. I haven't found it too difficult to analyze or manage holdings (thanks in large part to xcel; if you have a better tool to recommend, I'm open!), but I'm also the one who monitors and maintains the AA across the different accounts (T-IRA, Roth IRA, T-401k, R-401k, taxable, etc not to mention the AA for the 529, Coverdell, Health Savings Account, etc). Perhaps I'm overthinking it, trying to make it ideal instead of just "very good."

[nisiprius]

Well, gee. It depends. How much complication and how much of a difference in expenses? No, I'm not an absolutist. And I do put a fairly heavy weight on simplicity.

When I had an account at Fidelity and needed a TIPS fund, even though I dislike what I perceive as the complications of ETFs, I was willing to invest in the iShares TIP ETF instead of FIdelity's FINPX, because of the difference in expense ratio (and the $75 transaction fee to purchase Vanguard mutual funds in a Fidelity account).

I think I got a sort of lesson in perspective. Back when the minimum for Admiral shares was $100,000, I realized that I had over $40,000 in VBMFX and over $60,000 in VTSMX, and that the Vanguard Balanced Index Fund is just 40% Total Bond and 60% Total Stock. So, I exchanged them for Admiral shares of Balanced Index (VBIAX), complicating things slightly. I was congratulating myself on saving over $100 a year in expenses, and mentally deciding what to spend it on, when 2008-2009 hit and the fund lost about $30,000. Now, sure, the savings were still there, and some would say "the extra complication was totally worth it in order to lose $30,000 instead of $30,100." I am not one of those people.

Complexity is not cost-free. The chances of "losing the picture," overlooking things, and generally getting confused and making mistakes increases with complexity. And anyone who's had to take on the sad task of locating the assets of a deceased person knows that there is, absolutely, a real danger of the heir not finding everything.