Fund selection in 401k and IRA

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nanobots
Posts: 8
Joined: Tue Sep 02, 2014 7:19 pm

Fund selection in 401k and IRA

Post by nanobots » Tue Sep 02, 2014 10:16 pm

Hello!

I've been reading Bogleheads, Reddit, MMM, business on Flipboard, and other places for a few months now. The plane has been on autopilot with a Target Date fund for a few years but now I'm ready and willing to be hands on. I am a detailed person and feel I can stomach most risk. I am a software engineer and so expect good job prospects for the foreseeable future. My aim is to primarily get advice on fund selection in 401k, IRA, taxable, and maybe asset allocation. (Which I'm sure you all will comment on anyway. :) )

Emergency funds: Twelve months+ though I have been using my taxable accounts for this purpose.
Debt: Mortgage at 3.375%, automobile loan for 3.5 more years at 0%.
Tax Filing Status: Single
Tax Rate: barely 28% Federal, 4.9% State
State of Residence: KS
Age: 32
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

My total portfolio is low six figures.


Current retirement assets

Taxable
12.4% Steadfast Income REITs (???)
12.1% American Funds Fundamental Investors (ANCFX) (0.63%)
4.5% American Funds Money Market (AFAXX) (0.39%) Will soon be withdrawn and spent.

Roth 401k
Company match? $0.75 on the dollar up to 10%.
70.3% T Rowe Price 2045 Trust Fund T1J (0.57%) Used to be TRRKX until sometime last year.
0.4% Vanguard Institutional Index I (VINIX) (0.04%)
0.1% Vanguard Mid Cap Index I (VMCIX) (0.08%)
0.1% Vanguard Small Cap Index I (VSCIX) (0.08%)

IRA
None yet. I plan to open one next year and contribute for 2013 and 2014. Quite possibly with Vanguard. (I think I've drank the koolaid!)

Contributions

New annual Contributions
$17,500 401k + employer $10,300
$5,500 IRA/Roth IRA
$6k taxable (for retirement, not short term goals). Not 100% sure yet but probably anywhere from $5k to $10k at times.

Available funds

Funds available in 401(k)
T. Rowe Price Retirement 2045 Trust T1J (0.57%)

Stocks
Vanguard Institutional Index I (VINIX) (0.04%)
Vanguard Small Cap Index I (VSCIX) (0.08%)
Vanguard Mid Cap Index I (VMCIX) (0.08%)
T. Rowe Price Equity Income Trust D (0.60%)
T. Rowe Price Growth Stock Trust D (0.60%)
T. Rowe Price US Mid-Cap Growth Equity Trust D (0.70%)
Oakmark Equity & Income I (OAKBX) (0.77%)
T. Rowe Price Mid-Cap Value (TRMCX) (0.81%)
Everything else has ERs higher than 0.81%

Bonds
PIMCO Total Return Instl (PTTRX) (0.46%)
T. Rowe Price New Income (PRCIX) (0.62%)

Money Market
T. Rowe Price Prime Reserve (PRRXX) (0.55%)

Other
T. Rowe Price Stable Value Common Trust Fund - N (0.20%) Not sure of it's classification. The Morningstar report says it primarily invests in investment contracts.


Questions:
1. As you can see I literally just changed my 401k to include the three Vanguard funds. I'm not unhappy with the T. Rowe Price TD fund. From what I can tell from playing in Excel with returns each year and factoring in expenses, it looks like it would have returned more over the last five years than a 90/10 stocks/bonds and 70/30 domestic/international from using the Vanguard funds in my 401k and pretending I had TBM and TISM in an IRA at the appropriate ratios for them all.

That said I realize it would have to make an additional 0.46% return each year just to match the difference in expense ratios. However, I was thinking of keeping it, reducing the contribution to 25%-50% of my 401k, and then pretending it doesn't exist and go do my own thing. If we're supposed to be diversified how about diversifying the managers (us)? Or do you really think it would be worth it to just dump it and reallocate it to other funds?

2. I setup the three Vanguard funds to be 60% Institutional Index, 20% Mid Cap, and 20% Small Cap (100% within themselves. Currently in the 401k 50% is still going towards the TD fund.) I was trying to follow the wiki on approximating TSM but what I have is a tilt towards small, right? No real reason other than small might return a bit more so I decided why not go for the risk.

3. I have been reading quite a bit of angst about PIMCO Total Return Instl (PTTRX). Should I avoid it and go with T. Rowe Price New Income (PRCIX)? If I go 100% stocks in the 401k I could do 70% Vanguard Total Bond Market Index Fund (VBMFX) and 30% Vanguard Total International Stock Index Fund (VGTSX) in the IRA which would get me the correct contribution ratio for stocks/bonds but would be ~10% too few international stock. And also I'm sure I would have to rebalance the 401k and take some from stocks and put it into bonds since the contribution amount is so much greater than the IRA.

4. Asset Allocation: Was planning on starting 90/10 and reducing stocks by 5 every 5 years. Seems reasonable from everything I've been reading.

5. I have an irrational desire to buy into REITs, most likely using Vanguard REIT Index Fund (VGSIX) in the future. It probably partially stems from my financial advisor putting me in some already but also because I've read they have a lowish correlation to stocks. I was thinking of 10% AA but would build up to it.

Steadfast Income has had a rock steady return of 0.62% each month since I have owned it in 2012. I realize it would be better in a tax-advantaged account though. If I put VGSIX in the IRA there's not enough space for VBMFX to meet AA contribution goals and would also push international stock to taxable accounts.

6. I have read about placing funds appropriately in tax advantaged space. My idea was to put most of the 401k into the three Vanguard funds and a little bit into one of the bond funds. Then have the rest of the bonds, international stock, some REITs, and maybe eventually TIPS in the IRA. Not enough space for the first three initially but I could get into one of the others when I have to rebalance. (Partially wanting stocks, bonds, and REITS all in the IRA and stocks/bonds in the 401k to make it easier to rebalance.)

If I go 100% stocks in the 401k then that also means I would need about $11k for international stocks which will probably be a bit difficult to do in taxable by itself with no help from the IRA.


I think that about covers all my questions for now. Sorry for being so wordy. Thanks for reading and thanks for any feedback in advance! You guys/gals are great!
Sean

placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Fund selection in 401k and IRA

Post by placeholder » Wed Sep 03, 2014 10:31 am

At your tax rates I would not use Roth 401k nor keep REIT in taxable.

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Duckie
Posts: 5618
Joined: Thu Mar 08, 2007 2:55 pm

Re: Fund selection in 401k and IRA

Post by Duckie » Wed Sep 03, 2014 6:14 pm

nanobots, welcome to the forum.

You have an AA of 90% stocks, 10% bonds (low), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds.
nanobots wrote:4.5% American Funds Money Market (AFAXX) (0.39%) Will soon be withdrawn and spent.
Obviously not part of the retirement portfolio.
Roth 401k
In your tax bracket you're much better off in a traditional 401k.
IRA
None yet. I plan to open one next year and contribute for 2013 and 2014. Quite possibly with Vanguard. (I think I've drank the koolaid!)
Why are you waiting? This should be a Roth IRA not a Traditional IRA. And either Vanguard or Fidelity are the best custodians.
Other
T. Rowe Price Stable Value Common Trust Fund - N (0.20%) Not sure of it's classification. The Morningstar report says it primarily invests in investment contracts.
Find out what this is paying. It may be a decent alternative to PIMCO Total Return.
1. As you can see I literally just changed my 401k to include the three Vanguard funds. I'm not unhappy with the T. Rowe Price TD fund. From what I can tell from playing in Excel with returns each year and factoring in expenses, it looks like it would have returned more over the last five years than a 90/10 stocks/bonds and 70/30 domestic/international from using the Vanguard funds in my 401k and pretending I had TBM and TISM in an IRA at the appropriate ratios for them all.

That said I realize it would have to make an additional 0.46% return each year just to match the difference in expense ratios. However, I was thinking of keeping it, reducing the contribution to 25%-50% of my 401k, and then pretending it doesn't exist and go do my own thing. If we're supposed to be diversified how about diversifying the managers (us)? Or do you really think it would be worth it to just dump it and reallocate it to other funds?
The three Vanguard funds plus PIMCO Total Return will be fine in the 401k. You don't need the TD fund. Once you have a taxable account for retirement purposes, a TD fund just complicates things.
2. I setup the three Vanguard funds to be 60% Institutional Index, 20% Mid Cap, and 20% Small Cap (100% within themselves. Currently in the 401k 50% is still going towards the TD fund.) I was trying to follow the wiki on approximating TSM but what I have is a tilt towards small, right? No real reason other than small might return a bit more so I decided why not go for the risk.
Mid/small caps are roughly 20% of the US stock AA. You've doubled that. (And that's ignoring the REITs which are mostly small caps.)
3. I have been reading quite a bit of angst about PIMCO Total Return Instl (PTTRX). Should I avoid it and go with T. Rowe Price New Income (PRCIX)? If I go 100% stocks in the 401k I could do 70% Vanguard Total Bond Market Index Fund (VBMFX) and 30% Vanguard Total International Stock Index Fund (VGTSX) in the IRA which would get me the correct contribution ratio for stocks/bonds but would be ~10% too few international stock. And also I'm sure I would have to rebalance the 401k and take some from stocks and put it into bonds since the contribution amount is so much greater than the IRA.
Go with PIMCO Total Return for the bonds in the 401k.
4. Asset Allocation: Was planning on starting 90/10 and reducing stocks by 5 every 5 years. Seems reasonable from everything I've been reading.
I think 90/10 is too aggressive, but that's a personal opinion.
5. I have an irrational desire to buy into REITs, most likely using Vanguard REIT Index Fund (VGSIX) in the future. It probably partially stems from my financial advisor putting me in some already but also because I've read they have a lowish correlation to stocks. I was thinking of 10% AA but would build up to it.
If you're going to overweight REITs absolutely put them in tax-sheltered.
Steadfast Income has had a rock steady return of 0.62% each month since I have owned it in 2012. I realize it would be better in a tax-advantaged account though. If I put VGSIX in the IRA there's not enough space for VBMFX to meet AA contribution goals and would also push international stock to taxable accounts.
International is perfect for taxable because of the 
Foreign tax credit.
6. I have read about placing funds appropriately in tax advantaged space. My idea was to put most of the 401k into the three Vanguard funds and a little bit into one of the bond funds. Then have the rest of the bonds, international stock, some REITs, and maybe eventually TIPS in the IRA. Not enough space for the first three initially but I could get into one of the others when I have to rebalance. (Partially wanting stocks, bonds, and REITS all in the IRA and stocks/bonds in the 401k to make it easier to rebalance.)
Work with what you actually have, not what you wish you had. Put PIMCO and the three Vanguard funds in the 401k. Put international (if you can make the switch without too much of a tax hit) in taxable. Put leftover international and REITs in the Roth IRA. Ignore TIPS for now. (You could buy 
I savings bonds through Treasury Direct instead.)
If I go 100% stocks in the 401k then that also means I would need about $11k for international stocks which will probably be a bit difficult to do in taxable by itself with no help from the IRA.
You don't have to get everything exactly the way you want it right off the bat. This is a work-in-progress.

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Fund selection in 401k and IRA

Post by dickenjb » Wed Sep 03, 2014 6:33 pm

placeholder wrote:At your tax rates I would not use Roth 401k nor keep REIT in taxable.
A big +1 to both those points. And good luck making a 2013 contribution to your IRA next year.

nanobots
Posts: 8
Joined: Tue Sep 02, 2014 7:19 pm

Re: Fund selection in 401k and IRA

Post by nanobots » Wed Sep 03, 2014 9:07 pm

Thanks for the responses! I do appreciate it.
dickenjb wrote:
placeholder wrote:At your tax rates I would not use Roth 401k nor keep REIT in taxable.
A big +1 to both those points. And good luck making a 2013 contribution to your IRA next year.
Oops! Wrong years. Thanks dickenjb, I'm going to need that luck. I'll let you know if I manage to pull it off. :mrgreen:

I just re-read the wiki on the advantages of Traditional vs Roth and I have to say, it can be quite confusing! I'm presuming you both say go Traditional due to being in a high tax bracket now?
Duckie wrote: You have an AA of 90% stocks, 10% bonds (low), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds.
Sorry, I meant that was what I was thinking of moving to. Discounting the AFAXX that I will be spending, with the Target Date fund my allocation is currently 78% stocks (71 domestic/ 29 international), 7% bonds, 13% REITs, 2% cash. Of course that will change when I ditch the TD fund.
Duckie wrote:
IRA
None yet. I plan to open one next year and contribute for 2013 and 2014. Quite possibly with Vanguard. (I think I've drank the koolaid!)
Why are you waiting? This should be a Roth IRA not a Traditional IRA. And either Vanguard or Fidelity are the best custodians.
I'm finishing a couple things up, hence spending AFAXX, and I like to move slowly and think (over think I'm sure) in general. It wouldn't hurt to open a Roth IRA in a couple weeks I guess.
Duckie wrote:
Other
T. Rowe Price Stable Value Common Trust Fund - N (0.20%) Not sure of it's classification. The Morningstar report says it primarily invests in investment contracts.
Find out what this is paying. It may be a decent alternative to PIMCO Total Return.
By paying I presume you mean its returns?
Investment Return % YTD (as of 3/31/14) 0.50 1 year 2.16 3 year 2.56 5 year 3.18 10 year 3.80 Since Inception (1988) 5.44

Here is the description for it. It "seeks maximum current income while maintaining stability of principal. The Trust will invest primarily in Guaranteed Investment Contracts (GICs), Bank Investment Contracts (BICs), Synthetic Investment Contracts (SICs), and Separate Account Contracts (SACs). GICs, BICs, SICs, and SACs are types of investment contracts that are designed to provide principal stability and a competitive yield."
Duckie wrote: Mid/small caps are roughly 20% of the US stock AA. You've doubled that. (And that's ignoring the REITs which are mostly small caps.)
So it would be about 80% Institutional Index, 10% mid and 10% small?

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Duckie
Posts: 5618
Joined: Thu Mar 08, 2007 2:55 pm

Re: Fund selection in 401k and IRA

Post by Duckie » Thu Sep 04, 2014 12:58 pm

nanobots wrote:I just re-read the wiki on the advantages of Traditional vs Roth and I have to say, it can be quite confusing! I'm presuming you both say go Traditional due to being in a high tax bracket now?
Mostly, yes. See these article by tfb: 
The Case Against Roth 401(k) and Roth 401(k) for People Who Contribute the Max.
By paying I presume you mean its returns?
Investment Return % YTD (as of 3/31/14) 0.50 1 year 2.16 3 year 2.56 5 year 3.18 10 year 3.80 Since Inception (1988) 5.44
Okay, this paid 2.16% last year. Think of this as a high-yield savings account. It can never lose money but it may not make much. I'm not sure if 2.16% is enough to warrant using instead of Total Return.
So it would be about 80% Institutional Index, 10% mid and 10% small?
Close. It'd be about 81/6/13, but 80/10/10 is fine. See Approximating total stock market.

nanobots
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Joined: Tue Sep 02, 2014 7:19 pm

Re: Fund selection in 401k and IRA

Post by nanobots » Thu Sep 04, 2014 8:20 pm

Thanks Duckie.

One last question. If I switch over to a Traditional 401k the Roth stays where it is right? So I essentially would have a Traditional and Roth 401k, separate from each other money wise but in the same account, with all new contributions going to the traditional, and I would have to plan to get my overall AA correct between both of those and a Roth IRA?

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Duckie
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Re: Fund selection in 401k and IRA

Post by Duckie » Fri Sep 05, 2014 3:56 pm

nanobots wrote:If I switch over to a Traditional 401k the Roth stays where it is right?
Right.
So I essentially would have a Traditional and Roth 401k, separate from each other money wise but in the same account, with all new contributions going to the traditional, and I would have to plan to get my overall AA correct between both of those and a Roth IRA?
Right.

nanobots
Posts: 8
Joined: Tue Sep 02, 2014 7:19 pm

Re: Fund selection in 401k and IRA

Post by nanobots » Fri Sep 05, 2014 9:46 pm

Thanks placeholder, Duckie, and dickenjb. I will switch to a Traditional 401k, open that Roth IRA, and work on getting my AA ironed out. Thanks for the help and advice!

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