Questions: 401K fund choices; Which Int'l Funds to use

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Posts: 36
Joined: Tue Feb 25, 2014 11:19 am

Questions: 401K fund choices; Which Int'l Funds to use

Post by kingomri » Tue Feb 25, 2014 12:40 pm

Emergency funds: I try to keep around 1-2 months of expenses in the bank. I work in an in-demand field, and my job is secure right now. Will increase in coming years.
Debt: $136k Mortgage@ 2.43%
Tax Filing Status: MFJ, one dependent child
Tax Rate: 15% Federal, 3.74% State
State of Residence: OH
Age: 26 (wife is 24)
Desired Asset allocation: 100% stocks
Desired International allocation: 20% of stocks or less

Current retirement accounts:
His American Funds 401k - ~$9,000 ($~7,500 vested) split evenly between RGACX (Growth Fund of America) and RFNCX (Fundamental Investors)
His Vanguard IRA - $5,600 VTSMX (Total US Stock Market)
Her Vanguard IRA - $5,700 VTSMX (Total US Stock Market)

$5,500 His IRA
$5,500 Her IRA
$12,200 His 401K (6% employer match - 4% safe harbor match, 2% on 6-year vesting schedule)
Depending on raise amount, I'm hoping to bump this up to the max contribution of $17.5k

Available funds:
Funds available in his 401(k):
All of the below are share class R3
EuroPacific Growth Fund - RERCX -1.14%
The Growth Fund of America - RGACX - 0.98%
The New Economy Fund - RNGCX - 1.15%
SMALLCAP World Fund - RSLCX - 1.40%

"Growth and Income"
Capital World Growth & Income Fund - RWICX - 1.09%
Fundamental Investors - RFNCX - 0.96%
Washington Mutual Investors Fund - RWMCX 0.97%

Capital Income Builder - RIRCX - 0.97%

American Balanced Fund - RLBCX - 0.95%

American High-Interest Trust - RITCX -1.01%
The Bond Fund of America - RBFCX - 0.92%

American Funds Money Market Fund - RACXX - 0.51%

1. I am shooting for early semi-retirement. My calculations put this at around early-mid 40s. While this gives me a shorter time horizon, I am comfortable with the risk of a 100% stock portfolio since the worst-case-scenario is just to work for a few more years. I can shift to a more conservative allocation after retirement.
2. I know it's likely people will recommend I contribute to a Roth instead of Traditional IRA. My wife and I both pride ourselves on living simply, and the plan is to use a Roth pipeline to access the traditional IRA money - slowly withdrawing it over many years and paying little to no tax on it. That is why, even being in the 15% bracket, I prefer a traditional IRA.

1. I'm working on trying to convince my employer to switch away from American Funds into something that has index fund options, preferably Vanguard (obviously there is no index fund above). Apparently this is something they are thinking about, but it may take a while. I'm not necessarily optimistic. Seeing as I'm trying to max out tax-advantaged space, how would I best be served to invest this money in my 401k? I've tried to pick stock funds with low ERs, but if someone has any additional ideas about this, I'd be open to hearing them.
2. I'm invested very little in international at this point (some of the 401k funds goes to international). Since I have such a small portfolio now, I'm working to get up to Admiral Shares in our Vanguard accounts before I get them. When I do get to the point where I'm putting money in a taxable account, should I invest in international stocks there? I'm planning on my taxable account being a brokerage account buying ETFs for TLH purposes. Which international ETF should I buy (VEA? VXUS? VEU?) and why? VEA is "tax-managed" (not exactly sure what that means), but it's developed markets only, so I would need to get emerging markets exposure elsewhere if I wanted it. I read somewhere that it's not ideal to have an Emerging Markets ETF/fund in taxable since if a certain country becomes reclassified as no longer an EM, it forces a taxable event when the fund is forced to sell everything in that country.

Another thought is to invest in the EuroPacific Growth Fund (RERCX) in the 401K for international and invest in Total US Stock Market (VTI) in taxable. I've heard EuroPacific is "a good fund," though I don't quite trust that since it's actively managed, and it looks to me like its outperformance is based on a lucky 2009. Its higher expense ratio (1.14% vs. the weighted 0.97% I'm paying now) has kept me from investing in it at all.

Sorry for all the rambling above. I would appreciate any thoughts or input.

Posts: 7973
Joined: Mon Feb 19, 2007 7:40 pm

Re: Questions: 401K fund choices; Which Int'l Funds to use

Post by Laura » Sat Mar 01, 2014 3:29 pm

I have two comments. To answer your question, I suggest you use the Vanguard Total Intl Stock Market fund in one of the IRAs rather then trying to use an international fund in the 401k. Second, I think you should add at least 10% bond to your portfolio. I would do that in one of the IRAs as well using the Vanguard Total Bond Market fund. If you look at the Callan Table you can see that bonds provide useful diversification and stability to the portfolio.

Good luck on the quest to get them to add index funds. That would make a huge difference. Even one Total Stock Market or S&P 500 fund would make a difference.

The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

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