amateur seeks advice about funds in 401k

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Topic Author
jonathansm
Posts: 2
Joined: Tue Feb 19, 2013 8:50 pm

amateur seeks advice about funds in 401k

Post by jonathansm »

Hi everyone,

I recently stumbled across this site and have been trying to learn more about investing for retirement. Prior to this, I more or less randomly chose target date retirement funds based on stock/bond percentages and tried my best to achieve my desired asset allocation based on the available funds in my 401k.

I've often heard that certain 401k's don't have great funds, etc. I'd appreciate your opinions about how I've set up the funds in my 401k, and if based on the available funds, there would be a better way to go about it.

Emergency funds: 6 months
Tax Filing Status: Single
Tax Rate: 33% Federal, ?9% State
State of Residence: CA
Age: 28
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 15-20% of stocks

Current retirement assets

His 401k (75k)
30% PIMCO Total Return I Intermediate-Term Bond 0.46
20% Vanguard Institution Large Blend 0.04
20% Vanguard Small Cap G Small Growth 0.08
10% DFA Global Allocatio Conservative Allocation 0.33
10% Artisan International Foreign Large Blend 1.19
5% Dodge & Cox Stock Large Value 0.52
5% Oakmark International Foreign Large Blend 1.06

His Roth IRA at Fidelity (50k)
100% Fidelity Freedom Fund 2030 FFFEX (0.71)

Contributions
New annual Contributions
$17500 his 401k (5% match)
I think nondeductible contributions to 401k possible but not sure about being able to Rollover, still trying to find this out.
$5500 his IRA/Roth IRA (backdoor)
$30000 Cash

Available funds

Funds available in his 401(k)
Artisan International Fund, ARTIX, 1.19%
DFA Global Equity Portfolio, DGEIX, 0.33%
Global Allocation 25/75 Portfolio - Institutional Class, DGTSX, 0.28%
Global Allocation 60/40 Portfolio - Institutional Class, DGSIX, 0.31%
Dodge & Cox Stock Fund, DGDGX, 0.52%
Oakmark International, OAKIX, 1.06%
PIMCO Total Return Instl ,PTTRX, 0.46%
Dodge & Cox Stock Fund
Invesco Stable Value Trust
Vanguard Institutional Index Fund VINIX, VINIX, 0.04%
Vanguard Small Cap Growth Index Institutional, VSGIX, 0.08%
Vanguard Wellington Admiral Shares, VWENX, 0.19%
Munder Veracity Small-Cap Value Y, VSVIX, 1.25%
Galliard Stable Value FundView Prospectus, 0.495%
Vanguard Total Bond Market Index Institutional VBTIX, 0.07%

Questions:
1. I've often heard that certain 401k's don't have great funds or higher fees, etc. I'd appreciate your opinions about how I've set up the funds in my 401k, and if based on the available funds, there would be a better way to go about it.

2. Are there better options for my Roth at fidelity that would work better for my overall portfolio? I've thought about transferring over to Vanguard and set up a more 3-fund-esque portfolio with lower expenses, but I wonder if its worth the trouble of doing so if there are acceptable alternatives from fidelity.

3. From my reading, I was planning on opening a taxable account with vanguard and putting large cap stock funds and international indexes, perhaps munis/I-bonds. If I were to do this, I was thinking it would make more sense to work first from the 401k to pick the best available funds, then from the other accounts to achieve my overall desired AA.

I'd really appreciate your opinions and thoughts.
DaveS
Posts: 1308
Joined: Fri Jun 15, 2007 9:42 am
Location: Reno, NV

Re: amateur seeks advice about funds in 401k

Post by DaveS »

I have seen a lot worse possibilities and costs than your 401. I note the international selections are really high cost. So your smart to want to start a taxable account with these and large blend funds. Both are tax efficient. I would make the large blend fund vanguard total stock market. It is very tax efficient and it allows you to reduce the percentage in the small growth fund. I would also substitute Total Bond for the PIMCO in the 401. They perform about the same, but one costs .07 and the other .46. If you went to a restaurant and they had two similar meals but one was almost 7 times more expensive, would you really buy the more expensive meal?

Lastly I understand why you have the small cap growth fund. There is no other good small cap choice for the 401. Over the next couple of years you might try to reduce your holding in that asset class. Even if you add more small blend to a taxable account. Of the 9 asset classes in the morningstar box, small growth, over longer periods is the worst performing. This has been explained by speculators constantly bidding up this asset class hoping to find the next Microsoft. The last 5 years are one of the few time periods when small growth has done better than small value or blend. Dave
moneytobless
Posts: 51
Joined: Wed Feb 06, 2013 5:42 pm
Contact:

Re: amateur seeks advice about funds in 401k

Post by moneytobless »

Hey jonathansm,

Welcome to the forums.

1) As you mention in your second question, I think the 3 fund portfolio would be easier and cheaper for you to manage. You can approximate the Total Stock Market with a combination of 82% VINIX and 18% VSGIX.

2) If you are going to implement the 3 fund portfolio, I'd move the Roth over to Vanguard and invest in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).

3) Am I reading it correctly in that you have $30,000 to invest above your 401k and IRA contributions? Yes, I'd open up a taxable account and put Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) there.

A 65/35 allocation with 15% of your stock allocation in international stocks would look like this:

45% VINIX
10% VSGIX
10% VTSAX
35% VBTIX

Based on this tax-efficient investing article (http://www.bogleheads.org/wiki/Principl ... _Placement), I'd put all the bonds and some stocks in your 401k, Total Stock Market Index Fund in your Roth, and Total International Stock Index Fund in your taxable account.
Topic Author
jonathansm
Posts: 2
Joined: Tue Feb 19, 2013 8:50 pm

Re: amateur seeks advice about funds in 401k

Post by jonathansm »

Thanks for your helpful responses.

I also just found out there's an annual "management fee" of $50 per year with the 401k. nice.

Can anyone comment about I-bonds and if they would be a good addition to my portfolio? I've read about them and understand how they work, but I still don't quite understand how they can be utilized advantageously in a portfolio. I am currently in the 33% bracket, and I'm not sure where I'll be in 30 years.

Also, it seems like people tend to talk about % allocation into different subclasses within stocks (large, small, emerging, etc.), but I haven't seen much discussion about how one would do so in the bonds portion (short, intermediate, us treasuries, international, etc.). I suppose its less relevant for a total bond index fund, but it seems some funds consist of mortgage, derivatives, etc (For example, the summary of FBIDX states: "Engaging in transactions that have a leveraging effect on the fund, including investments in derivatives - such as swaps (interest rate, total return, and credit default) and futures contracts - and forward-settling securities, to adjust the fund's risk exposure." I'd appreciate your comments.
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Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: amateur seeks advice about funds in 401k

Post by Duckie »

jonathansm, you want an AA of 65% stocks, 35% bonds (conservative for your age), with 15-20% of stocks in international. I'll choose 20%. That breaks down to 52% US stocks, 13% international stocks, and 35% bonds. Here is a possible retirement portfolio as of the end of 2013:

Taxable at Treasury Direct -- $10K -- 5%
5% 
I Savings Bonds

Taxable at Vanguard -- $30K -- 17%
4% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)
13% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

His 401k -- $90K -- 50%
20% (VINIX) Vanguard Institutional Index Fund Institutional Shares(0.04%)
30% (VBTIX) Vanguard Total Bond Market Index Fund Institutional Shares (0.07%)

His Roth IRA at Vanguard -- $50K -- 28%
22% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
6% (VEXAX) Vanguard Extended Market Index Fund Admiral Shares (0.14%) <-- Roughly 80% large caps (Institutional Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.

-- This has TISM in taxable to take advantage of the 
Foreign tax credit.
-- I chose 20% of stocks in international instead of 15% because Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds.
-- If you keep your Roth IRA at Fidelity you could use the following funds:
(FSTVX) Spartan Total Market Index Fund Advantage Class (0.06%)
(FSEMX) Spartan Extended Market Index Fund Investor Class (0.10%)
-- You don't need munis; you have plenty of room in your tax-deferred accounts. I Bonds are a different issue and can only be purchased through Treasury Direct.

Something to think about.
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