Portfolio advice for 401K with no match & high ER

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chartcab3785
Posts: 103
Joined: Fri Jul 11, 2014 12:30 am

Portfolio advice for 401K with no match & high ER

Post by chartcab3785 »

Been lurking here for a year or so. Finally registered and gathered up my portfolio info to post for some questions.

Emergency funds: Yes, 6+ months. It is not formally separated from a general savings acct and a brokerage acct (with vanguard)
Debt: $97k mortgage @ 3.25% with 20% MCC (Make extra payments when we end up with unallocated extra cash)
Tax Filing Status: Married Filing Jointly
No Children
Tax Rate: 25% Federal, 8.25% State
State of Residence: HI
Age: 35 / 37
She is self employed (commissioned sales)

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 25% of stocks

Total Retirement Portfolio : 133k

Current retirement assets

His 401K ‘PS PLAN’ (small business - 25 employees, no company match since 2008)

22% Oppenheimer Global Opportunities Fund Class C OGICX (1.94%)
12% Oppenheimer Small & Mid Cap Value Fund Class C QSCCX (1.92%)
8% Oppenheimer Flexible Strategies Fund C QOPCX (2.87%) !
8% Oppenheimer Capital Appreciation Fund Class C OTFCX (1.82%)
7% Oppenheimer Rising Dividends C OCRDX (1.81%)
6% Oppenheimer International Diversified Fund Class C OIDCX (2.02%)
3% Oppenheimer Limited-Term Bond Fund Class C OUSCX (1.66%)
3% Oppenheimer Limited-Term Government Fund Class C OLTCX (1.67%)
Other Available 401K funds:
0% Oppenheimer Global Strategic Income Class C OSICX (1.78%)
0% Oppenheimer International Bond Fund Class C OIBCX (1.75%)
0% PL Portfolio Optimization Conservative Fund Class Retirement POARX (1.65%)
0% PL Portfolio Optimization Moderate-Conservative Fund Class Retirement POBRX (1.70%)
0% PL Portfolio Optimization Moderate Fund Class Retirement POCRX (1.73%)
0% PL Portfolio Optimization Moderate-Aggressive Fund Class Retirement PODRX (1.78%)
0% PL Portfolio Optimization Aggressive Fund Retirement Class POERX (1.83%)

His Roth IRA at Vanguard (started 2013)
8% Vanguard 500 Index Fund Admiral Class VFIAX (.05%)
1% Vanguard Target Retirement 2035 Fund Investor Shares VTTHX (.18%)

Her Roth IRA at Vanguard (started 2012)
12% Vanguard 500 Index Fund Admiral Class VFIAX (.05%)
10% Vanguard Target Retirement 2035 Fund Investor Shares VTTHX (.18%)

Contributions

Annual Contributions
$8400 his 401k (recently upped from $4300)
$5500 his Roth IRA
$5500 her Roth IRA

As an aside the brokerage account is low five figure and made up of:
30% Vanguard MSCI EAFE ETF VEA (.09%)
8% Vanguard Intermediate-Term Bond ETF BIV (.10%)
10 % Vanguard REIT ETF VNQ (.10%)
9% Vanguard Total Bond Market ETF BND (.08%)
43% Vanguard Total Stock Market ETF VTI (.05%)

Questions:
1. How would you recommend I reallocate my 401K fund balances based on my desired AA and the expense ratios of the available funds?

2. I was considering upping my 401K contributions to about $14,400/yr. When I started looking at the actual funds, I was pretty shocked by the expense ratios. (Yes I should have noticed sooner) Since there is no company match, should I not bother? Further, should I actually reduce or stop contributions and instead put these in Vanguard TIRA’s for her or both of us? At what point do excessive expense ratios negate the 401K tax advantages?

3. I doubt that there is anything I can do about the poor fund choices in my 401k? It seems to be done through a local bank and administered by ascensus. As mentioned, the company is small and I believe less than half of the employees contribute to the plan. HR is co-owner and questions or comments about the lack of good choices may be ill-received. I could possibly inquire with the ‘investment professional’ from the local bank who is listed on my statements.

I’m happy to provide any other information if needed. If there is anything else that seems like an oversight I am interested to hear.

Obviously I am getting a little bit of a late start with the saving and investing bit. I am new to this but doing lots of reading and learning. Glad to have found the right place for sound information. Looking forward to feedback.
madbrain
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Re: Portfolio advice for 401K with no match & high ER

Post by madbrain »

chartcab3785 wrote: 2. I was considering upping my 401K contributions to about $14,400/yr. When I started looking at the actual funds, I was pretty shocked by the expense ratios. (Yes I should have noticed sooner) Since there is no company match, should I not bother? Further, should I actually reduce or stop contributions and instead put these in Vanguard TIRA’s for her or both of us?
In your case, I would cut contributions to $0 in that plan due to the ER . The lack of match isn't even relevant when the ERs are so high. The ERs are paid annually and would easily cost more than any match .
At what point do excessive expense ratios negate the 401K tax advantages?
Your plan is already at that point, IMO.
3. I doubt that there is anything I can do about the poor fund choices in my 401k? It seems to be done through a local bank and administered by ascensus. As mentioned, the company is small and I believe less than half of the employees contribute to the plan. HR is co-owner and questions or comments about the lack of good choices may be ill-received. I could possibly inquire with the ‘investment professional’ from the local bank who is listed on my statements.
If you are not willing to bring this issue up with HR, then your next choices would be to
a) do some after-tax investing . You can invest in index funds that have low taxable yields. There are some tax-managed versions of Vanguard index funds.
Also consider municipal bonds including Hawaii bonds since you have state income tax.
b) find a job with a better 401k plan
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Duckie
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Re: Portfolio advice for 401K with no match & high ER

Post by Duckie »

chartcab3785, welcome to the forum.

Ouch! That's a bad plan. You have a desired AA of 70% stocks, 30% bonds, with 25% of stocks in international. That breaks down to 52% US stocks, 18% international stocks, and 30% bonds. Here is a possible retirement portfolio:

His 401k -- 69%
69% (POCRX) PL Portfolio Optimization Moderate Fund Class Retirement (1.73%) <-- Roughly 60% stocks, 40% bonds/fixed. For the portfolio it's about 28% US stocks, 13% international stocks, and 28% bonds. It's one of the cheaper options.

His Roth IRA at Vanguard -- 9%
9% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.17%)

Her Roth IRA at Vanguard -- 22%
14% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.17%)
5
% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
3% (VBMFX) Vanguard Total Bond Market Index Fund Investor Shares (0.20%)

My comments:
  • I'm not a fan of mixing balanced fund with individual funds but the Portfolio Optimization funds are the best options in the 401k when you consider the bond AA is only 30% and the 401k hold 69% of the entire portfolio. Something's gotta give.
  • If the taxable brokerage account is for retirement it should be included in the portfolio and the percentages refigured. And if it is for retirement it should not hold bonds or REITs. They belong in tax-sheltered accounts. It should only hold VTI and VEA (although VXUS is better than VEA).
Something to think about.
HurdyGurdy
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Re: Portfolio advice for 401K with no match & high ER

Post by HurdyGurdy »

chartcab, I feel your pain, this may be one of the worst 401k plans I've seen in this board. Duckie is a hero for trying to do something with it. Does your plan provide something like a Stable Value Fund ?
Topic Author
chartcab3785
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Joined: Fri Jul 11, 2014 12:30 am

Re: Portfolio advice for 401K with no match & high ER

Post by chartcab3785 »

Thanks for all the comments so far. Especially for trying to making the best of the bad options. Is the advice by madbrain to cut contributions to $0 the consensus? Should I then leave what is there and reallocate per Duckie's suggestions? Further, what type(s) of accounts should I then open and allocate funds to?

Really appreciate it!
Wayson
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Re: Portfolio advice for 401K with no match & high ER

Post by Wayson »

I don't think I've ever seen a 2.87% expense ratio. That's comically high, can't fathom how a manager could justify that.

I'm certainly no expert, but my instinct when confronted with a plan that bad would be to simply abandon the plan, as madbrain says. I would go further and suggest that you roll over everything from the 401k into a Traditional IRA, and conduct further investing using a brokerage account and the Roth IRAs. The funds that Duckie mentions for Her Roth IRA would make a great three-fund portfolio.
johnny847
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Re: Portfolio advice for 401K with no match & high ER

Post by johnny847 »

First off, I think it would make more sense for your wife to start a solo 401k for her self employment income. The first 17500 (less employer FICA contribution) can be put into a solo 401k. Then I think it's 25% of employer profits until $52k? Or something like that. Vanguard does provide solo 401k options. I believe they charge a $20 annual fee, but unless your wife's self employed income is fairly low, the $20 should be way better than the outrageous ERs in your 401k.

As for your 401k....

I tried playing with some numbers. Whether the 401k is worth it heavily depends on tax rates at retirement, which is hard to account for since they potentially could change dramatically (in either direction).

If you make a $17500 contribution to a 401k, you get a 33.25% tax savings = $5819. Vanguard tells me that the historical return for a 60/40 allocation for the fund Duckie selected is 8.9%. I further assumed you start withdrawing in 25 years.

17500(1+.089-.0173)^25 = 98825
And invest the tax savings in a taxable account, assumed same before expense return for simplicty:
5818(1+.089)^25 = 49037.

Now here's the tricky part. Guessing your tax rate at retirement. I'm going to assume that you will live on less than the top of the 15% marginal federal bracket. In 2014 dollars, that would correspond to income of (73800+2(6200+3950) = 94100
Assume an average tax rate of 9% fed + 5% state on your 401k withdrawals (I don't know Hawaii's tax structure and your state rate may need some fixing). Also assume that all of your LTCG is taxed at 0% fed + 5% state.

401k withdrawals: 98825*(.86) = 84989
selling of taxable: 49037-(49037-5818)*.05 = 46876
Total after tax income in retirement: 131865

Compare this to a $17500 contribution to a taxable account:
17500(1+.089)^25 = 147480

At 0% federal LTCG and average 5% state
Total after tax income in retirement: 147480 - (147480-17500)*.05 = 140981


So with these numbers, you are better off abandoning the 401k. But keep in mind I did not actually calculate what income an average federal tax rate of 9% corresponds to. I do know that if you had in 2014 enough income taxed at standard rates, not LTCG rates, to fill the 15% bracket, your average tax rate would be 10.8%. Also, I just totally guessed on what your average state tax rate would be. And of course, tax rates could change. Oh and I assumed that you would get the same return before fees for your money invested in a taxable account as you would in your 401k. but of course you could use a different allocation and net a greater return.

So in summary, your wife should set up a solo 401k first. Do not contribute anything to your 401k until she has at least maxed out the employee contribution of $17500. After that, I believe she can contribute 25% of her income, with up to $52k total contribution (employee+employer). After her employee contribution is when you should consider contributing to your 401k. I probably wouldn't abandon the 401k entirely, just to hedge against a possible drop in taxes later. However, I wouldn't increase your contributions either.
Jack FFR1846
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Re: Portfolio advice for 401K with no match & high ER

Post by Jack FFR1846 »

My 401 is not much better. Although individual funds have better ER, I have to pay a high UAM for everything and a 12b-1 fee. I'm at 1.25% for the absolute cheapest fund (a bond fund). I don't plan to stay at this job (with zero match) forever, so my whole strategy is to get the money in so I can roll it into my IRA when I leave (I'm interviewing tonight :) )
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Re: Portfolio advice for 401K with no match & high ER

Post by placeholder »

Jack has a good point in that if you aren't planning to stay long then you can fill it up and roll it over when you go.
TheRightKost87
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Re: Portfolio advice for 401K with no match & high ER

Post by TheRightKost87 »

Wayson wrote:I don't think I've ever seen a 2.87% expense ratio. That's comically high, can't fathom how a manager could justify that.
Wow! that must be the best manager ever if he charges 2.87%!! :wink:
Wayson wrote:I'm certainly no expert, but my instinct when confronted with a plan that bad would be to simply abandon the plan, as madbrain says. I would go further and suggest that you roll over everything from the 401k into a Traditional IRA, and conduct further investing using a brokerage account and the Roth IRAs. The funds that Duckie mentions for Her Roth IRA would make a great three-fund portfolio.
He can't roll out of the 401k until he changes jobs, but as others have mentioned, if they'll be a job change soon that is the best course of action.
"The problem with diversification is that it works, whether or not we want it to"
dickenjb
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Re: Portfolio advice for 401K with no match & high ER

Post by dickenjb »

Your 401(k) plan is a real stinker.

You say your wife is SE - why doesn't she open a Solo 401(K) with Vanguard or Fidelity and the two of you max that out in addition to maxing his and hers Roths?
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ruralavalon
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Re: Portfolio advice for 401K with no match & high ER

Post by ruralavalon »

Welcome to the forum :) .
chartcab3785 wrote:She is self employed (commissioned sales)
. . . . .
Thanks for all the comments so far. Especially for trying to making the best of the bad options. Is the advice by madbrain to cut contributions to $0 the consensus? Should I then leave what is there and reallocate per Duckie's suggestions? Further, what type(s) of accounts should I then open and allocate funds to?
What an awful 401k. However there is a way around that.

Because your wife is self-employed she can create her own work-based plan,such as: (1) "Solo 401(k) plan"; (2) "SEP"; and (3) "SIMPLE IRA".

The plans have different limits, and different responsibilities and requirements for paper-work. For a comparison please see: Vanguard, "Small-business plans, comparison".

In my opinion she should set up one of these plans. She can set up any of these plans at Vanguard, they will help with the details: "We can provide all the help you need to set up your plan. Call a small-business specialist at 800-662-2003." link.

In general, your account funding priority for future contributions could be
(1) max out the contributions ($5.5k/yr each) to the two Roth IRAs;
(2) contribute the maximum allowed to her new work-based plan; and
(3) then consider contributing to your 401k.
This may mean no future contributions to your 401k, depending on the contribution limit for the plan chosen for your wife.

If after steps 1 and 2 above are fully funded there is still additional money to invest, then it may still be wise to contribute to your high-expense 401k. First, if you leave this employer you can transfer your 401k balance to a rollover IRA at Vanguard and then switch everything to low-expense funds. Second, your employer may someday have get a better 401k with better fund choices, which you could switch to those better funds. Third, unless you stay at your current employer for a long time, the benefit of the tax deduction and tax-deferred growth is often outweighs the effect of high expenses, please see: wiki, "401k; Expensive or mediocre choices".
Last edited by ruralavalon on Wed Jul 16, 2014 3:24 pm, edited 1 time in total.
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livesoft
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Re: Portfolio advice for 401K with no match & high ER

Post by livesoft »

My spouse's former plan was worse. She took out the maximum 401(k) loan possible in order to not pay the fees on that $50,000 and invested it elsewhere in low-expense-ratio funds. Perhaps your plan allows loans?

Note that 2% fees on $50,000 is $1,000 saved. :)
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Topic Author
chartcab3785
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Re: Portfolio advice for 401K with no match & high ER

Post by chartcab3785 »

Lots of great thoughts. At a minimum, I'll be stopping contributions to my 401k and we'll open a solo 401k for her. Reallocate to balance for the desired AA and get out of the real stinkers.

I'd love to find a job with a better plan, but that would probably mean a 40% pay cut, thus less funds available to invest.

Thanks again everyone. :sharebeer
SGM
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Re: Portfolio advice for 401K with no match & high ER

Post by SGM »

Since your wife is self employed and if she has no additional employees setting up a solo 401k is a great idea. If there is something you could do for her business, you could be paid a salary and it could also go into the solo 401k. Both husband and wife could have all new 401k money in the new plan. There is a profit sharing component so a couple could conceivably put in more than the $17,500 x 2 limit yearly. There is no yearly 5500 EZ reporting until total assets are over $250,000.

A few years ago, my wife was doing some work for my s-corp and was able to put her whole salary including a 401k component and profit sharing into her solo 401k. FICA taxes still had to be paid but that was a small price to pay to my mind. You could both continue to put $5,500 into IRAs.

In a few years you could have quite a large traditional or Roth 401k. Also if your solo 401k is written correctly you could transfer the money into an IRA whenever you want.

Seriously consider a solo 401k and you may go from paycheck to playcheck sooner than you thought possible.
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Re: Portfolio advice for 401K with no match & high ER

Post by placeholder »

If you do go the i401k route I would not recommend Vanguard as they don't allow incoming rollovers (not currently a concern for the OP) nor do they provide access to Admiral shares or ETFs.
Topic Author
chartcab3785
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Re: Portfolio advice for 401K with no match & high ER

Post by chartcab3785 »

UPDATE:

I've stopped my 401K contributions and moved the balance of it into POCRX per Duckie's suggestion. I have not yet reallocated the Roth balances.

Currently working through the Vanguard i401k forms. When I called VG to discuss setting up the i401k, the rep told me that there is a $20 annual fee per fund available to the i401k. As such I wanted to keep this simple and stick with probably just one fund. I'm thinking Target Retirement 2035 VTTHX. Any thoughts on this? I realize that VTTHX has a higher stock/bond AA than I originally indicated I desired. I'm a little wishy-washy on that I suppose. I think I can stomach the lows of a heavier stock AA.

I haven't quite figured out whether it makes any functional difference to do the contributions as the employee or the employer. Since the contribution will be in the neighborhood of $15k/yr, she'll not be above the employee limit.

Anything else I should consider?

Again, appreciate all the previous responses and countless other threads I've dug up for info on the subject.
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