Rebalancing for the first time ever with bad 401(k) options

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cenzy
Posts: 3
Joined: Tue Mar 14, 2017 7:19 pm

Rebalancing for the first time ever with bad 401(k) options

Postby cenzy » Sat Mar 18, 2017 3:25 pm

We are relatively new to investing (started in 2015), although I understand the general principles of keeping costs low and diversifying with index funds instead of picking individual stocks. I am planning to rebalance for the first time ever next month, with the plan being to rebalance every 6 months after that. I’d like recommendations on how to plan a decent portfolio around some ridiculously expensive 401(k) options.

Situation
Emergency Funds: Yes
Debt: $12,000 in student loans (subsidized at 0% until she graduates with her PhD in 2019 or 2020; we are saving up to pay these off before 6.8% interest kicks in). No credit card debt. We are renters with no car, so we have no mortgage or car debt. We have no plans to buy either any time soon.
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal (gross annual income 120k), 5.1% State
State of Residence: MA
Age: Both 29
Desired Asset Allocation: 90% stocks / 10% bonds (open for discussion)
Desired International Allocation: 20% of stocks (open for discussion)

Current Retirement Assets ($81,500 total)
Taxable ($11,500)
14.1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)

His 401(k) ($25,700)
31.5% Hartford Core Equity Fund Class R4 (HGISX) (0.80%)

Her 401(k) ($0)
0% Not available and not expected to be available for several years

His Roth IRA at Vanguard ($23,800)
29.2% Vanguard Target Retirement 2060 Fund Investor Shares (VTTSX) (0.16%)

Her Roth IRA at Vanguard ($20,500)
25.1% Vanguard Target Retirement 2060 Fund Investor Shares (VTTSX) (0.16%)

New Annual Contributions ($32,400 including match)
$18,000 his 401(k) (+ $3,400/year from employer match)
$5,500 his Roth IRA
$5,500 her Roth IRA
$0 taxable (we have not contributed to taxable account since 401(k) became available last year)

Available Funds
Funds available in his 401(k)
State Street Cash Series US Government Fund – Class L (N/A) (0.75%)
BlackRock Low Duration Bond Portfolio (BLDAX) (0.79%)
JPMorgan Government Bond Fund (OGGAX) (0.75%)
Loomis Sayles Investment Grade Bond (LIGRX) (0.83%)
T. Rowe Price Retirement 2005 Fund – Class R (RRTLX) (1.08%)
… other T. Rowe Price Retirement Funds up through 2060 (1.08% - 1.25%)
Janus Balanced Fund (JABRX) (1.08%)
Neuberger Berman Large Cap Value Fund (MBPBX) (1.21%)
Hartford Core Equity Fund (HGISX) (0.80%)
Fidelity Advisor Leveraged Company Stock Fund (FLSAX) (1.07%)
Janus Enterprise Fund (JGRTX) (1.17%)
Neuberger Berman International Select Fund (NBNAX) (1.30%)
Hartford Healthcare Fund (HGHSX) (1.31%)
Deutsche Real Estate Securities Fund (RRRAX) (0.98%)
Franklin Utilities Fund (FKUTX) (0.73%)

Questions
1. Are target asset allocations (90/10 stocks/bonds) and 20% international stocks reasonable? How much should this be influenced by what options are available? We do not plan on retiring early or taking extended mid-career breaks, but we realize those things are not always voluntary.
2. I think we are reaching the point where we can transition away from the target date funds and shift to a 3 or 4-fund portfolio, but I don’t know how to think about the 401(k). Is there a better way to construct a balanced portfolio from these options? I am having a hard time conceptualizing asset allocation across accounts with different tax statuses, different account totals, different annual contribution limits, etc. At 18k/year in contributions, the 401k (with its awful options) is obviously growing much faster than the IRAs.
3. Cruddy 401(k) is at a startup, so there is a chance we’ll have the "opportunity" to roll it over to an IRA over if the company goes under. Does that possibility change what we should be doing now?
4. Am I missing anything else we should be doing? We are hoping to have kids in the next few years, which could make the budget very tight for a while (day care is $$$ here and the lower earner is not interested in being a stay-at-home parent). I would like to come up with a strategy that will carry us through a few potentially lean years.

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badbreath
Posts: 231
Joined: Mon Jul 18, 2016 7:50 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby badbreath » Sat Mar 18, 2017 5:29 pm

What I would do is change your taxable account to a Vangard international Non US index to get the foreign tax credit( may have tax implications to switch).You would be good international as hartford and the Targets have international in them. Then add BlackRock Low Duration Bond Portfolio to your 401K to get your bonds up.

One other thing only look and rebalance once a year not every 6 months
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

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Duckie
Posts: 4592
Joined: Thu Mar 08, 2007 2:55 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby Duckie » Sat Mar 18, 2017 7:18 pm

cenzy, welcome to the forum.

cenzy wrote:Funds available in his 401(k)

The best (trying not to laugh) options are:
  • Hartford Core Equity Fund (HGISX) (0.80%) -- Mostly large cap US stocks
  • Loomis Sayles Investment Grade Bond (LIGRX) (0.83%) -- Bonds
Are the loads waived or do you have to pay them?

Are target asset allocations (90/10 stocks/bonds) and 20% international stocks reasonable?

I tend to recommend at least 20% bonds, but at age 29 10% is not ridiculous. I usually recommend 30% of stocks in international because Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. 20% is reasonable.

How much should this be influenced by what options are available?

Very little since you have assets outside the limited 401k.

I think we are reaching the point where we can transition away from the target date funds and shift to a 3 or 4-fund portfolio, but I don’t know how to think about the 401(k). Is there a better way to construct a balanced portfolio from these options? I am having a hard time conceptualizing asset allocation across accounts with different tax statuses, different account totals, different annual contribution limits, etc. At 18k/year in contributions, the 401k (with its awful options) is obviously growing much faster than the IRAs.

See below.

Cruddy 401(k) is at a startup, so there is a chance we’ll have the "opportunity" to roll it over to an IRA over if the company goes under. Does that possibility change what we should be doing now?

No. Pick the best/lowest cost options in the 401k and use your other accounts to fill in what's missing.

You want 90% stocks, 10% bonds, with 20% of stocks in international. That breaks down to 72% US stocks, 18% international stocks, and 10% bonds. You could have:

Taxable at Vanguard -- $11.5K -- 14%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)

His 401k -- $25.7K -- 32%
22% (HGISX) Hartford Core Equity Fund Class R4 (0.80%)
10% (LIGRX) Loomis Sayles Investment Grade Bond Fund Class A (0.83%)

His Roth IRA at Vanguard -- $23.8K -- 29%
11% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.16%)
18% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $20.5K -- 25%
25% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)

Just some possibilities.

cenzy
Posts: 3
Joined: Tue Mar 14, 2017 7:19 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby cenzy » Sat Mar 18, 2017 8:59 pm

Duckie wrote:Taxable at Vanguard -- $11.5K -- 14%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)

His 401k -- $25.7K -- 32%
22% (HGISX) Hartford Core Equity Fund Class R4 (0.80%)
10% (LIGRX) Loomis Sayles Investment Grade Bond Fund Class A (0.83%)

His Roth IRA at Vanguard -- $23.8K -- 29%
11% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.16%)
18% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $20.5K -- 25%
25% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)

Very helpful, thanks! I'm guessing we don't pay a load because the paycheck deduction appears to buy us approximately the right amount of investment. I did read the 401(k) plan documents carefully early on and I didn't see anything about extra load fees. I'm not sure how I would check beyond that, but I am open to suggestions.

Just to understand the logic here: the purpose of splitting the 401(k) and buying bonds is to help keep the stock/bond ratio intact. Otherwise, as the 401(k) grows we get increasingly too stock-heavy?

In 6 months, based on the fact that we are contributing more and more to the 401(k), we may very well find ourselves too heavy on U.S. stocks with not enough international exposure. Rebalancing at that time would involve selling VTSMX in His IRA and using the proceeds to buy VTIAX in His IRA. Changing allocation in the 401(k) tweaks stock/bond proportions and changing allocation in His IRA adjusts the domestic/international proportions. Is that the idea?

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Duckie
Posts: 4592
Joined: Thu Mar 08, 2007 2:55 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby Duckie » Sun Mar 19, 2017 5:51 pm

cenzy wrote:Just to understand the logic here: the purpose of splitting the 401(k) and buying bonds is to help keep the stock/bond ratio intact. Otherwise, as the 401(k) grows we get increasingly too stock-heavy?

Yes.

Changing allocation in the 401(k) tweaks stock/bond proportions and changing allocation in His IRA adjusts the domestic/international proportions. Is that the idea?

Yes.

aristotelian
Posts: 911
Joined: Wed Jan 11, 2017 8:05 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby aristotelian » Sun Mar 19, 2017 7:01 pm

Sorry, that 401k is one of the worst I have ever seen. I wish I had some constructive advice on the rebalancing but seems like you are doing the best you can with the options you have. If you are unable to max out your plans while you have the kids in daycare, you should obviously cut back on the 401k and just try to get your company match and max the Roths.

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Peter Foley
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Location: Lake Wobegon

Re: Rebalancing for the first time ever with bad 401(k) options

Postby Peter Foley » Sun Mar 19, 2017 7:58 pm

Potential silver lining: High fees are bad, especially over the long term. They are like negative compound interest. One would hope that you will have lower cost options in the future.

Once again Dukie has done a good job of laying things out.

I think most here would be inclined to rebalance less frequently, perhaps once a year. Some do it much more often, so it is your call.

cenzy
Posts: 3
Joined: Tue Mar 14, 2017 7:19 pm

Re: Rebalancing for the first time ever with bad 401(k) options

Postby cenzy » Sun Mar 19, 2017 8:00 pm

Thanks, Duckie. This was very helpful.

I was having a brain block about rebalancing because I was trying to apply principles for one account (e.g., get as much as possible into lower-cost admiral shares) to the scenario with multiple accounts. Obviously if we have one account containing bonds and one account containing stocks with absolutely no way to move money between the two accounts, rebalancing is not going to work! :oops:

And aristotelian, I agree these options are horrible. I'm just happy the plan exists at all after two years of "startup options are your 401k" nonsense. I am hopeful the investment options will improve in the future.


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