Help choosing between 4 bond funds in 401k

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daveh1983
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Help choosing between 4 bond funds in 401k

Post by daveh1983 » Wed Apr 10, 2013 11:11 am

Goal: I am looking for help with choosing between the 4 bond funds that I have available in my 401(k).

Just need help choosing the best bond fund(s) for my situation. I realize bonds are controversial right now and I understand I won't make much return on them, but I'm looking for the option that best rounds out Boglehead's rule #4 regarding correlation. I have a minimum of 30 year time frame to leave this alone once selected:

FA STRAT INCOME A (FSTAX)
Expense: 0.98%
Strategy: Investing primarily in debt securities by allocating assets among four general investment categories: high yield securities, U.S. Government and investment-grade securities, emerging market securities, and foreign developed market securities. The fund uses a neutral mix of approximately 40% high yield, 30% U.S. Government and investment-grade, 15% emerging markets, and 15% foreign developed markets. Engaging in transactions that have a leveraging effect on the fund.
Composition: http://portfolios.morningstar.com/fund/ ... ture=en-us

MFS LTD MATURITY R3 (MQLHX)
Expense: 0.86%
Strategy: The fund normally invests its assets primarily in debt instruments. Debt instruments include corporate bonds, U.S. government securities, asset-backed securities, municipal instruments, foreign government securities, inflation-adjusted bonds, and other obligations to repay money borrowed. Its dollar-weighted average effective maturity will normally not exceed five years.
Composition: http://portfolios.morningstar.com/fund/ ... ture=en-us

PIM TOTAL RETURN A (PTTAX)
Expense: 0.85%
Strategy: The fund normally invests at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts, or swap agreements. It invests primarily in investment-grade debt securities, but may invest up to 10% of its total assets in high yield securities ("junk bonds") rated B or higher by Moody's, or equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO to be of comparable quality.
Composition: http://portfolios.morningstar.com/fund/ ... ture=en-us
Last edited by daveh1983 on Wed Jun 05, 2013 8:17 pm, edited 3 times in total.

DTSC
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Re: 30 yo single modest income

Post by DTSC » Wed Apr 10, 2013 11:46 am

I'm posting more to give you a bump so that others who are more experienced and wiser can comment.

You might want to list the expense ratios of the funds in your 401K plan and whether there is much of a company match.

From what I can see, you are doing OK. You are saving more than 10% of gross income in your Roth IRA. Keeping the ratio of Vanguard Total Stock and Total Bond Index looks good.

You already hold the key to financial success - spending less than you make and paying off all debt.

daveh1983
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Re: Help choosing between 4 bond funds in 401k

Post by daveh1983 » Thu Apr 11, 2013 11:21 pm

Thanks for the bump!

I edited the fluff out of this post with the goal of just zeroing in on the bond question.

ieee488
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Re: Help choosing between 4 bond funds in 401k

Post by ieee488 » Fri Apr 12, 2013 7:40 am

TMPL GLOBAL BOND A is out
Not only do you have to worry about interest rates; you also have to worry currency fluctuations.
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DTSC
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Re: Help choosing between 4 bond funds in 401k

Post by DTSC » Fri Apr 12, 2013 7:50 am

All funds seem to have pretty high ER's to me. Bonds are not fancy instruments. They are loans. Higher risks demand higher yields. IMO none of these look so good.

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Tim_in_GA
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Re: Help choosing between 4 bond funds in 401k

Post by Tim_in_GA » Fri Apr 12, 2013 8:18 am

I've been happy with PIMCO Total Return but then it's my only bond fund choice besides a high-yield fund.

Scooter57
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Re: Help choosing between 4 bond funds in 401k

Post by Scooter57 » Fri Apr 12, 2013 9:41 am

Historically the PIMCO funds have provided very satisfying returns for their owners despite the high expenses. However, the Total Return fund is huge now, and that means it can't be as nimble as it has been in the past.

Plus, the past was a period where income investments rose effortlessly due to declining rates. We have yet to see how PIMCO funds handle a prolonged period of rising rates.

I have a small amount invested in Pimco Income Institutional (PIMIX available from Vanguard without the requirement to make a huge initial investment.) I am curious to see how it performs going forward, but I wouldn't stake my financial future on it. It has a relatively short duration and a higher yield, which is a good combination in today's market. But it is heavily invested in mortgages (as are most of the PIMCO income funds.) How safe that might be going forward is the unanswered question.

retiredjg
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Re: Help choosing between 4 bond funds in 401k

Post by retiredjg » Fri Apr 12, 2013 9:50 am

Welcome to the forum!

I would use the PIMCO fund. But I think you chould consider if there is a reasonable stock fund in the 401k to use some stocks there too. This could reduce the overall cost of the 401k and therefore the overall cost of the portfolio.

Twins Fan
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Re: Help choosing between 4 bond funds in 401k

Post by Twins Fan » Fri Apr 12, 2013 10:27 am

Why would you not want bonds in your Roth IRA? That's a tax advantaged account, so no worries about holding bonds there.

Looks like your Roth is the bigger account ($$) now and will outgrow the 401k going forward, if contributions continue as you list. There's probably a pretty low cost S&P 500 index fund in your 401k. I would throw all your 401k money in the S&P fund and then complete the 3-fund portfolio in your Roth.

You could have the S&P 500 index fund in the 401k, as the only fund in that one, and then total stock, total international, and total bond in your Roth IRA. That way all your rebalancing would be done in the Roth. Sure, there's some overlap with the S&P and total stock, but it would be an easy portfolio to manage. And, may be the best option for your situation?

NYBoglehead
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Re: Help choosing between 4 bond funds in 401k

Post by NYBoglehead » Fri Apr 12, 2013 10:32 am

I'd go with the PIMCO Fund or go with TBM in my Roth IRA and stick to just the equity funds in the 401k (providing they are decent).

daveh1983
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Re: Help choosing between 4 bond funds in 401k

Post by daveh1983 » Fri Apr 12, 2013 11:06 am

Thanks for the welcome and the ideas! I don't see an index fund choice.
Last edited by daveh1983 on Wed Jun 05, 2013 8:18 pm, edited 1 time in total.

retiredjg
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Re: Help choosing between 4 bond funds in 401k

Post by retiredjg » Fri Apr 12, 2013 11:22 am

I think the least bad choice is the PIMCO fund. Continue on with your original plan. :D

An argument could be made that it is less bad to pay .99% for a stock fund than .85% for a bond fund. I'm not making that argument, just pointing out it is reasonable.

I also think you can make an argument to your employer that having at least 1 index fund (say, an S&P 500 Index) would go a long way in improving the employer's fiduciary responsibility to employees. It is likely that such a fund is available, but just has not been added.


Wiki article link: How to Campaign for a Better 401(k) Plan

Twins Fan
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Re: Help choosing between 4 bond funds in 401k

Post by Twins Fan » Fri Apr 12, 2013 11:48 am

Oh, YUCK!! My bad, I assumed your 401k plan wasn't trying to rob you. :D Usually there's at least one decent index fund available and typically it's a S&P 500 type. You don't even have that.

I agree then... PIMCO total return is probably the best of the choices you have and only contribute enough to get the match in that one.

daveh1983
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Re: Help choosing between 4 bond funds in 401k

Post by daveh1983 » Fri Apr 12, 2013 12:46 pm

Alright, I have a plan then! Thanks for the feedback on PIMCO. That was the one that I originally leaned toward before posting this even though its future is very uncertain due to interest rates and its large size.

I'm fired up about getting some better 401(k) options now. I'll think about it for a few days and draft up a professional letter to the new CFO to make my case. The more I think about it it really seems important for the plan to have better options. Its contribution limit being 3x that of an IRA makes it the bigger account for people ready to set aside heavy retirement money. Until something changes there, I'll focus extra cash on home ownership.

retiredjg
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Re: Help choosing between 4 bond funds in 401k

Post by retiredjg » Fri Apr 12, 2013 5:52 pm

Sounds like a good idea. But as long as you are in the 15% tax bracket, it's probably better to contribute to the Roth IRA first anyway. The exception would be if you could get your taxable income low enough to get the Saver's Credit (seems unlikely) in which case it would be better to contribute to traditional IRA and then to traditional 401k.

Your 401k is not terrible, but it could be made significantly better with the addition of just one index fund. That not only protects the employer but gives the higher level employees/owners better choices as well. So it would not surprise me if you get that improvement, if not others. Good luck!

daveh1983
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Re: Help choosing between 4 bond funds in 401k

Post by daveh1983 » Fri Apr 12, 2013 9:17 pm

You know I considered that and ran some rough calculations this week. After insurance, 5% 401k, maxing HSA, I still need to get my taxable income 6,100 lower for the year to reach the saver's tax credit. A couple scenarios to reach that:

1.) 4k remaining space into a new tIRA and the other 2k into 401k. Disadvantage would be that I would miss out on the post tax Roth money this year. I like the idea of growing both types of accounts, especially because I'm in the lowish 15% bracket and who knows, I might pull it together and make big money later in life. Advantage is that this would leave me more cash to get that much closer to a housing purchase while values are still lowish- Everyone says I'm running out of time!

2.) Keeping the Roth maxed and dumping an extra 6k into 401k. I could do it but it would tie up a lot of cash this year and I still have the problem of poor 401k options.

The personal decision I have to make is whether either of these strategies is worth the $200 in tax savings from the credit.

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ruralavalon
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Re: Help choosing between 4 bond funds in 401k

Post by ruralavalon » Sat Apr 13, 2013 2:33 pm

I vote PIM TOTAL RETURN A (PTTAX), intermediate term good credit quality.
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