401k choices...

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Topic Author
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

401k choices...

Post by zmcpherson »

Hello again!

Everything with my IRA is going swimmingly, thank you guys again for your help in steering me in the right direction.

My new question has to do with my 401k. The new company i started with is offering me a limited selection of mutual fund choices and my gut is to just follow my IRA selection with a target retirement fund (2025), but the expense ratio is 1.23 which I know is pretty high. I wanted to ask you guys if that seems alright or if I should try and make my own combination of funds to make a 70-30ish mix.

A little about me, I'm 27, I have 10k into a ROTH IRA invested into vanguard's 2025 retirement plan, and I have 15k into savings. I was planning on contributing 10% of my paycheck to the the 401K (~$500-600 a month)

My 401k choices are:

Large Cap
BLKRK BASIC VALUE A
INVS S&P 500 INDEX A
MFS MA INV GRTH R3

Mid-Cap
NUVEEN MDCP INDEX A
PRU/J MID CAP GR A
VICTORY ESTB VALUE A

Small Cap
HEARTLAND VAL PLS IV
JANUS TRITON S
PIM SMCP STKPLS TR A

International
ALLNZ NFJ INTL VAL A

Specialty
IVY SCI & TECH A
PIM RE REAL RET A
PRU/J HEALTH SCI A

Other
MFS TOTAL RETURN R3

Blended Investments
FA FREEDOM 2005 T
FA FREEDOM 2010 T
FA FREEDOM 2015 T
FA FREEDOM 2020 T
FA FREEDOM 2025 T
FA FREEDOM 2030 T
FA FREEDOM 2035 T
FA FREEDOM 2040 T
FA FREEDOM 2045 T
FA FREEDOM 2050 T
FA FREEDOM 2055 T
FA FREEDOM INC T

Bond Investments
Income
FA STRAT INCOME A
FA TOTAL BOND A
FKLN HIGH INCOME A

Short-Term Investments
FID PRIME FUND

..........................

The 2025 plan has an expense ratio of 1.26, or I could do 30% FA Total Bond and 70% S&P 500 Index and have an expense ratio closer to .67. Though when it comes to these things, I have a feeling, like my ROTH IRA post, I am completely missing the the entire picture. So if neither choice is the wise choice, be kind : P .

Any and all help is greatly appreciated.

Thanks Guys,
Zach
NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: 401k choices...

Post by NYBoglehead »

It would be helpful if you listed all the expense ratios for the funds in order to get the best possible advice. That said, a .67 ER using the 70/30 mix you described instead of a 1.23 ER is definately the right thing to do. That .56 compounded over time will make a huge difference in your total return.

Not sure what your risk tolerance is, but I would suggest having your Roth in the Target 2025 is way too conservative for a 27 year old. You'll only be 40 when the target date is reached, probably 20 years+ from retirement. Nothing wrong with that if you want to be heavier in bonds, just know that not taking sufficient risk is a risk in and of itself.
Topic Author
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: 401k choices...

Post by zmcpherson »

haha sorry, I suppose I assumed that you all knew the ER's by heart : P

Large Cap
BLKRK BASIC VALUE A - .84
INVS S&P 500 INDEX A - .61
MFS MA INV GRTH R3 - .81

Mid-Cap
NUVEEN MDCP INDEX A - .93
PRU/J MID CAP GR A - 1.09
VICTORY ESTB VALUE A - 1.08

Small Cap
HEARTLAND VAL PLS IV - 1.16
JANUS TRITON S - 1.19
PIM SMCP STKPLS TR A - 1.09

International
ALLNZ NFJ INTL VAL A - 1.39

Specialty
IVY SCI & TECH A - 1.38
PIM RE REAL RET A - 1.18
PRU/J HEALTH SCI A - 1.25

Other
MFS TOTAL RETURN R3 - .77

Blended Investments
FA FREEDOM 2005 T
FA FREEDOM 2010 T
FA FREEDOM 2015 T
FA FREEDOM 2020 T
FA FREEDOM 2025 T - 1.21
FA FREEDOM 2030 T - 1.23
FA FREEDOM 2035 T - 1.27
FA FREEDOM 2040 T
FA FREEDOM 2045 T
FA FREEDOM 2050 T
FA FREEDOM 2055 T
FA FREEDOM INC T

Bond Investments
Income
FA STRAT INCOME A - .99
FA TOTAL BOND A - .84
FKLN HIGH INCOME A - .77

Short-Term Investments
FID PRIME FUND - .74

The reason why I chose the Vanguard 2025 instead of the Vanguard 2030 or the 2035 is because the mix right now looks like this:

2025 - 72/28
2030 - 79/21
2035 - 86.5/13.5

80/20 I figured is a little more risky then I would like while the market is still going through recovery
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: 401k choices...

Post by Duckie »

zmcpherson, given your 401k choices I would use:
(SPIAX) Invesco S&P 500 Index Fund A Shares (0.61%)
(FEPAX) Fidelity Advisor Total Bond Fund A Shares (0.84%)

Once your 401k gets around $15K I would swap the Vanguard 2025 Fund in your Roth IRA to the following:
(VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) <-- Roughly four parts large caps (500 Index) to one part mid/small caps (Extended Market) makes up the total US stock market.
(VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
and (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%) if there's room.
Topic Author
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: 401k choices...

Post by zmcpherson »

Duckie wrote:zmcpherson, given your 401k choices I would use:
(SPIAX) Invesco S&P 500 Index Fund A Shares (0.61%)
(FEPAX) Fidelity Advisor Total Bond Fund A Shares (0.84%)
Nice, I was right for a change.
Duckie wrote: Once your 401k gets around $15K I would swap the Vanguard 2025 Fund in your Roth IRA to the following:
(VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) <-- Roughly four parts large caps (500 Index) to one part mid/small caps (Extended Market) makes up the total US stock market.
(VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
and (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%) if there's room.
The 2025 fund as an ER of .18, with this plan, wouldn't I be raising the ER and completely doing away with the bonds/money markets?

I guess let me break down my thoughts so I can wrap my head around this.

Currently my IRA is invested at Vanguard in the 2025 fund at 72/28
My 401k is in Fidelity NetBenefits say, 75/25 SPIAX/FEPAX

After 15k in my 401k, I should change My Vanguard IRA to VEXMX, VGTSX, VTSMX which is 100% stock?

At 10% of my paycheck I could have 15k in my 401k in two years, but by then my Roth IRA will have 20k in it instead of 10k. Would your strategy still apply?

At that point wouldn't it be better to do this:
IRA-
10k - Admiral shares total stock Market (.06%)
10k - Admiral shares extended market index fund (.14%) or AS International (.18%)
401k
10k - SPIAX (.66%)
5k - FEPAX (.84%)

The reason that I suggest this is: .66 is the lowest ER offered in the 401k package, so I would think that i would want to put as much money into that as possible while still retaining a 70/30 or 75/25 ratio (which is the reason for 5k FEPAX). Then I can use Vanguard's ridiculously low Stock ER's to actually make the average lower.

thanks for the replies
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: 401k choices...

Post by Duckie »

With an AA of 70/30 (49/21/30), in two years you could have:

401k -- $15K -- 43%
13% (SPIAX) Invesco S&P 500 Index Fund A Shares (0.61%)
30% (FEPAX) Fidelity Advisor Total Bond Fund A Shares (0.84%)

Roth IRA at Vanguard -- $20K -- 57%
0% (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) <-- Roughly four parts large caps (500 Index) to one part mid/small caps (Extended Market) makes up the total US stock market. Because of the $3K fund minimum, add this when the 401k 500 Index gets to $12K.
21% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
36% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

Or you could put just SPIAX in the 401k for now and put (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.10%) in the Roth IRA. But I think bonds in the 401k are better even though FEPAX is more expensive.
ljwobker
Posts: 53
Joined: Sat Dec 06, 2008 4:30 pm

Re: 401k choices...

Post by ljwobker »

any chance your company offers a "self directed" approach? This is basically an account where you make your own investment decisions with the money that's in the account... you can buy (almost) any security within the account and still get the tax benefits.

I do that with mine, and I basically just use very low expense ratio index funds to approximate the mix of capitalisations, risks, stocks v. bonds, etc that I want...

At the very least you should ask your employer... the more people that ask the more likely you are to eventually get that option.
Topic Author
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: 401k choices...

Post by zmcpherson »

Sorry about the delayed response, labor day weekend.

@ ljwobker

No dice on the self directed plan and this company is probably too large to start switching things around.

@ Duckie

Alright, I will just go 70/30 in the 401k for now, and then when I hit these target numbers I will switch them over to the second strategy.

You commented on the 2025 plan before, do you think that 70/30 is too conservative for my age? Would 75/25 be better?

Also, you think the bonds in the 401k are that much better then Vangaurd's, even though Vangaurd's AS bonds have an ER of .10 and the 401k's has an ER of .84? When comparing the two, what key factors are you looking at to help you decide which is better (Im just trying to become more educated on what to look for in bonds and overcoming a .74 ER intrigues me)?
Last edited by zmcpherson on Wed Sep 05, 2012 11:38 am, edited 1 time in total.
NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: 401k choices...

Post by NYBoglehead »

75/25 would definately be more appropriate for your age, in my opinion. Especially in today's low interest rate environment for bonds. You've got ~38 years to retirement, the market will go up and down, all the while you will keep contributing and are years away from making withdrawls.
Topic Author
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: 401k choices...

Post by zmcpherson »

NYBoglehead wrote:75/25 would definately be more appropriate for your age, in my opinion. Especially in today's low interest rate environment for bonds. You've got ~38 years to retirement, the market will go up and down, all the while you will keep contributing and are years away from making withdrawls.
At what age would you switch to 70/30, 65/35, etc.?
NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: 401k choices...

Post by NYBoglehead »

I'd gradually become more conservative. If you're 27, holding 25% is really not a deviation from the "age in bonds rule of thumb." If you're doing 70/30 in your 401k, you already contributing more in bonds than your age. (It's a rule of thumb of course, not a universal truth of investing.)

If you have your money in TDF, it will become more conservative as you age on its own. As far as your 401k goes, every few years shift to become more conservative.
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