New 401k, New Options - Best of the Worst?

[jbran99]

Hi all. I've been lurking for a number of months and I've appreciated all I've learned on the forums and Wiki. I expected my first post to be a portfolio analysis in a few months, after I make more progress on simplifying my portfolio (based on what I've already learned), but my wife recently found out her company is changing 401k providers. Unfortunately, the company is moving to Principal and the fund choices aren't great. I'd greatly appreciate some commentary on her 401k.

Here's a (slightly) abbreviated portfolio overview, in order to keep the focus on the (less that stellar) options in Her 401k.

Ages: 33/29 (first kid on the way in late Aug, wife does plan to return to work after)
Emergency Funds: 9-12 mos. earning ~3% APY in local Community Bank High Interest Checking (Kasasa)
Debt: 112k @ 3.85% (mortgage, pay $250 extra each month), 13k @ 1.99% (1 vehicle)
Desired AA: 80/20 (Int'l 20% of total portfolio, 25% of stocks)
Tax Rate: 25% Fed, 7% MN

Taxable
4% Vanguard Total Int'l
4% Vanguard Total Stock
6% Ameriprise Floating Rate Bond (tax inefficient, I know; likely converting to VTSAX/VTIAX in the coming months)
10% Misc stocks (likely converting to VTSAX/VTIAX in the coming months)

His 401k
20% Vanguard Target 2040

His Roth (in flux)
32% Ameriprise Active Diversified Aggressive (transferring to Vanguard over the coming months)

Her Roth
6% Vanguard Total Stock
3% Vanguard Total Bond

Her 401k
15% Vanguard Target 2030 (Current holding, but not available in new 401k provider)

Her new 401k options (ER):
PLFMX - Principal LargeCap S&P500 R3 (.73) <--- Most likely choice; see below #1
PMFMX - Principal MidCap S&P400 R3 (.74) <--- Would a combo of Large & Mid be better? see below #2
FVITX - Fidelity Advisor Gov't Income T (.75)
PIOOX - Principal Income R3 (1.07)
PLSMX - Principal LifeTime Strategic Income R3 (1.19)
Principal LifeTime 20XX R3 Funds (1.26 - 1.40) <--- Not likely, so I didn't detail all 10 of the options
RWMCX - American Funds Washington Mutual R3 (.97)
PEIOX - Principal Equity Income R3 (1.08)
LAVRX - Lord Abbett Fundamental Equity R3 (1.24)
PPUMX - Principal Large Cap Growth I R3 (1.18)
GETGX - Victory Established Value R (1.25)
FSMRX - Franklin Small-Mid Cap Growth R (1.25)
GSQRX - Goldman Sachs Small Cap Value R (1.69)
FSCTX - Fidelity Advisor Small Cap T (1.51)
JSCRX - Prudential Jennison Small Company R (1.36)
RERCX - American Funds EuroPacific Growth R3 (1.13)
RNPCX - American Funds New Perspective R3 (1.11)

Annual Contributions:
Max ($17k) to his 401k plus ~$8k company match
Max ($5k ea.) to his & her Roth IRA
~$13k to her 401k plus ~$2k company match

Clarifications:
- I recognize I'm below my target AA for Bonds and Int'l. I'll be moving in that direction over the next 6 months as I migrate my Roth IRA from Ameriprise to Vanguard and adjust my taxable holdings. Since I have a plan in progress to address that, I'd really like to keep the focus for this post on her 401k choices.

Questions:
#1. Is it best to just put 100% of her 401k contributions into that (terribly overpriced) S&P500 index? If so, I would use the Roths (either his or hers) to match Total Market (based on the Wiki, using VEXMX or VIMSX+NAESX)
#2. Or would I be better off splitting her 401 contributions between the S&P500 and S&P400 (in Total Market appropriate percentages)? Again, I would use the Roths (either his or hers) to supply the Small Cap part of the Total Market Approximation.
#3. Are there any other funds in her 401k even worth considering? Based on the ERs, I've pretty much already eliminated the Principal Target Date funds.
#4. Random thought that just popped into my head - Because the company is changing 401k programs, does that mean we could rollover her 401k into an IRA at Vanguard? As opposed to rolling it into the new 401k program. Apologies in advance if that question doesn't make sense.
#5. Any other feedback anyone is willing to share?

Thanks in advance for any responses!

Edit: Clarified wife does plan to return to work after the baby

[ruralavalon]

Welcome to the forum .

Normally it is best to contribute to a 401k, even one with expensive options. It depends on how long you expect to be with that employer. http://www.bogleheads.org/wiki/Investin ... account.3F ; and viewtopic.php?p=827413#827413 .

Ages: 33/29 (first kid on the way in late Aug)

Is wife quitting employment in August? If so, do a rollover of her 401k to an IRA at Vanguard at that time.

#4. Random thought that just popped into my head - Because the company is changing 401k programs, does that mean we could rollover her 401k into an IRA at Vanguard? As opposed to rolling it into the new 401k program. Apologies in advance if that question doesn't make sense.

This may be possible, check with HR. I'm not sure if this can always be done, or whether it depends on the terms of the plan.

#5. Any other feedback anyone is willing to share?

Think about using the money she would otherwise pay into her 401k to pay down the mortgage more rapidly.

[jbran99]

It depends on how long you expect to be with that employer.

Ages: 33/29 (first kid on the way in late Aug)

Is wife quitting employment in August? If so, do a rollover of her 401k to an IRA at Vanguard at that time.

She enjoys working and it's a good company, so the current plan is to stay there for many years. She expects to go back after maternity leave; that could change, but we both expect that she will head back to work sometime in Nov. So a rollover isn't really an option at this time, but if things change, I won't hesitate to pull the trigger on that move. Thanks for the suggestion!

I did reach out to my wife's company about adding some lower-cost index fund options, but that may fall on deaf ears. I will also ask if a rollover is possible due to the change in plans.

[Default User BR]

#4. Random thought that just popped into my head - Because the company is changing 401k programs, does that mean we could rollover her 401k into an IRA at Vanguard? As opposed to rolling it into the new 401k program. Apologies in advance if that question doesn't make sense.

Not typically. When my old company "merged" with MyMegaCorp (really it was bought), our 401(k) transitioned to the new plan with no opportunity to take distribution. In fact they froze the plan until the transition was complete. They mapped all the old funds as best they could to the new offerings.

I don't think there's any way to claim that a change of administrator is a qualifying event for distribution.


Brian

[archbish99]

Pretty lousy options, I agree. I'd go with the Large Cap and Mid-Cap funds in market weight, and try to pick up Small in your other accounts. Be a bit of a headache to rebalance, but close enough is good enough.

[mackstann]

On the bright side, I've seen plans with NO options below 1% ER. So it could be worse.

[jbran99]

I'd go with the Large Cap and Mid-Cap funds in market weight, and try to pick up Small in your other accounts. Be a bit of a headache to rebalance, but close enough is good enough.

I was thinking along the same lines. Therefore, I thought rebalancing might be easier if I did 100% in the LargeCap in the 401k and never had to rebalance on the 401k side. Then I just do all the rebalancing (to get appropriate market weights) by using pieces of the Roth IRAs as necessary. Or are you thinking it would be easier to rebalance within the 401k if both LargeCap and MidCap are in there?

On the bright side, I've seen plans with NO options below 1% ER. So it could be worse.

Definitely true. The company does well just providing a 401k with a decent match, so I really can't complain that strongly. It's all about perspective...

[pingo]

I love those Vanguard Target Retirement funds, but it might help to know all of your 401k options in case the forum sees something you missed? I realize you wanted to keep your focus on her lousy 401k...

[Duckie]

Yeah, we need to know what's in your 401k. The TR fund complicates the issue.

[Easy Rhino]

Congratulations on jbran99Jr. We've got our first on the way in July.

You currently seem to be well under your target 20% bond allocation.

It's probably simplest to just hold SP500 in her 401k. Eventually, if it grows in size, and grows 'too large' for just large cap stocks, then consider holding SP500+SP400. If it grows larger still, then FVITX seems to be a reasonable bond fund.

You'd want to hold - ideally - international stocks in taxable and in the other Roths/IRAs, you'd want to hold your bonds, your extended market/small cap, and then leftover equities.

[jbran99]

Yeah, we need to know what's in your 401k. The TR fund complicates the issue.

How so? No matter what I have in His 401k, would you really consider anything from Her 401k beside S&P500 or S&P500 + S&P400? Once I make that decision, I can use the Roth IRA(s) to get to appropriate market weight levels to approximate Total Stock Market. I'll almost certainly have some left overs in the Roth IRA(s) that will be in Total Stock Market as well.

Approx ~6-12 months from now (once I get my Ameriprise Roth IRA and Taxable stuff better allocated), I plan to post a full Portfolio review. I'll detail out His 401k options and see if there are any hidden gems there. But for now, that's a significantly lower priority because it's allocated well, compared to the choices in Her 401k.

[jbran99]

Congratulations on jbran99Jr. We've got our first on the way in July.

Thanks much - I'm sure it's going to be a wild ride!

You currently seem to be well under your target 20% bond allocation.

I absolutely am, but that will be remedied in the next 6-12 months as I better allocate His Roth IRA away from Ameriprise and adjust Her Roth IRA give the changes in Her 401k.

It's probably simplest to just hold SP500 in her 401k. Eventually, if it grows in size, and grows 'too large' for just large cap stocks, then consider holding SP500+SP400.

This is where I was at initially and what prompted my post. I didn't know if there was a pro or con to putting 100% in LargeCap right away vs. splitting between Large & Mid.

Thanks for the feedback.

[pingo]

Yeah, we need to know what's in your 401k. The TR fund complicates the issue.

How so? No matter what I have in His 401k, would you really consider anything from Her 401k beside S&P500 or S&P500 + S&P400?

Perhaps, so, but the idea is to look at everything as a whole, which we like to do for a number of reasons including the perpetual itch to tinker!

You're not wrong per se, and nothing says we have to know. As provided, your plan and your intentions appear reasonable according to the information we have. It's that with His 401k data missing, we sit here with a big gaping hole in the picture, curiously wondering if there might be options in His 401k that also balance out and even improve the picture. Mixing target funds with individual funds is rarely suggested, but I some of us have to do it, too.

Once I make that decision, I can use the Roth IRA(s) to get to appropriate market weight levels to approximate Total Stock Market. I'll almost certainly have some left overs in the Roth IRA(s) that will be in Total Stock Market as well.

No argument here.

Approx ~6-12 months from now (once I get my Ameriprise Roth IRA and Taxable stuff better allocated), I plan to post a full Portfolio review. I'll detail out His 401k options and see if there are any hidden gems there. But for now, that's a significantly lower priority because it's allocated well, compared to the choices in Her 401k.

We'll be waiting...

[retiredjg]

Approx ~6-12 months from now (once I get my Ameriprise Roth IRA and Taxable stuff better allocated), I plan to post a full Portfolio review.

This is backwards. Cart before the horse and all.

When you post for a full portfolio review, it will invariably be suggested to move your Roth IRA away from Ameriprise. So there's no need to get it better allocated which will almost certainly cost you money anyway.

As for taxable, you may just be headed in the wrong direction and it will need to be fixed once again, possibly resulting in unnecessary taxes.

You should just go ahead and get this done now while you have your mind on it. You will not have more "spare time" later.

[Kevin M]

First, although the ER is high, American Funds EuroPacific Growth has tracked Vanguard Total International quite closely over the last five years (actually has done a little better), has a relatively large number of holdings (between 300 and 400), and has relatively low turnover compared to many actively managed funds. Basically it's a closet index fund. Given the limited choices, I would use this in the 401k for international if you are low on space elsewhere.

On the other hand, over the last five years the MidCap 400 fund has performed much closer to total US than to Vanguard's mid-cap index fund (which has performed pretty closely to the small-cap index fund), so I'm not sure how much diversification benefit it provides. So I probably would look to the IRAs for small cap before international.

Kevin