S&P 500 Admiral vs TSM Investor Shares in 401k

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S&P 500 Admiral vs TSM Investor Shares in 401k

Post by InKirkWeTrust » Tue Jul 04, 2017 12:42 am

My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by triceratop » Tue Jul 04, 2017 12:50 am

InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
Have you considered using S&P500 Admiral (VFIAX) in your 401k and Vanguard Extended Market Index Fund Admiral Shares (VEXAX) in your Roth? The correct proportion is about 19% Extended Market. This allows you to have full diversification and the lowest cost.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by BL » Tue Jul 04, 2017 12:57 am

How much difference is there between the 2 ERs?

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by Vanguard Fan 1367 » Tue Jul 04, 2017 1:34 am

I have had great success with my S & P 500 fund in my 401K. The selections aren't very good in my 401K but I am grateful that I have the 500 fund. It has been a significant part of my investing success. My ER in that fund is .87 percent. Most other options are higher ERs.

The .04 expense ratio is fabulous of the 500 fund you are offered. At the same time I would have no trouble at all paying the investor share price of .15 percent for the Total Stock Market. Either way Vanguard is charging almost nothing to let you enjoy whatever investment returns the market will give you. (Paraphrase of St. Jack).

I would probably go with the 500 fund due to the slightly lower ER.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by camaro327 » Tue Jul 04, 2017 4:41 am

The difference in the expense ratios is so minimal I would base it on my investment policy statement.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by cody69 » Tue Jul 04, 2017 5:02 am

You are very fortunate to have access to both Vanguard S&P500 and Total Stock Market funds in your 401K.
If this is your primary stock fund, then I would purchase the Total Stock Market fund as it is the most diversified.
If you slice and dice and are purchasing quantities of a small cap fund, then you may opt for the large cap S&P500 fund.

Honestly, the two track extremely close due to the dominate weighting of large cap companies, so in the long run you won't see a great deal of difference. Hence, no wrong answer which ever way you decide.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by SimplicityNow » Tue Jul 04, 2017 6:19 am

If the expense ratios Vanguard Fan posted are correct, you are talking about a difference of .11%. That is an $11/year difference per $10,000 invested.

Historically over the long term the two funds track each other very closely. I read somewhere it is close to 99%.

Both are great funds with very low expense ratios and both are solid investments. You really cannot go wrong with either choice.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by selters » Tue Jul 04, 2017 6:20 am

Would you pay 0.59% for Vanguard Extended Market Index Fund if it was available? Because that's essentially what you're doing if you choose TSM Investor Shares. If Extended Market is 20% of TSM and S&P 500 is 80% of TSM, then the expense ratio of an Extended Market Index Fund would have to be 0.59% for the weighted expense ratio of that portfolio to be 0.15%.

Extended Market contribution to weighted average expense ratio: 0.20x0.59=0.118
S&P 500 contribution to weighted average expense ratio: 0.80x0.04=0.032
Total weighted average expense ratio of portfolio: 0.118+0.032=0.15

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by retiredjg » Tue Jul 04, 2017 7:38 am

When I set up portfolio suggestions, I usually put Total Stock in the taxable account (if there is one) and 500 index and something to complete it (extended market or small cap) in the tax-advantaged accounts. I do this to avoid wash sales if the person wants to tax loss harvest.

I don't believe that the funds in a 401k can cause a wash sale, just funds in the IRAs, but it is actually an unknown so why not be on the safer side? Also it's easier to balance a 500 index and a completing fund in just the tax-advantaged accounts.

I can't think of any other reason to prefer one over the other unless the cost difference is worth paying attention to.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by ruralavalon » Tue Jul 04, 2017 8:30 am

InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
This is about as close to a tie as it's possible to get. I cannot think of a good reason to prefer one over the other.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by triceratop » Tue Jul 04, 2017 10:23 am

ruralavalon wrote:
InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
This is about as close to a tie as it's possible to get. I cannot think of a good reason to prefer one over the other.
I can. It is more expensive. Over a 40 year investing career with a 5% growth rate you will have 4.3% more money with a lower expense fund. Since the OP can access Vanguard Extended Market in their IRA, which was created specifically for this purpose, they can achieve full diversification for minimum cost. Of course it probably won't matter too much if they opt for the higher expense fund but it's clear IMO that this is not a tie.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by Silly Wabbit » Tue Jul 04, 2017 10:30 am

The TSM investor shares in the 401k should get converted to admiral shares once the plan hits the minimum balance (10k), no?

Hitting the 10k mark should be easy for a company plan. Is this a small company? Was TSM newly added?

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by triceratop » Tue Jul 04, 2017 10:35 am

Silly Wabbit wrote:The TSM investor shares in the 401k should get converted to admiral shares once the plan hits the minimum balance (10k), no?

Hitting the 10k mark should be easy for a company plan. Is this a small company? Was TSM newly added?
Not necessarily. 401k plans are not like retail brokerage accounts in this respect.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by InKirkWeTrust » Tue Jul 04, 2017 1:30 pm

Thanks for all your feedback! It seems to me that the consensus is the two funds are pretty darn close in terms of performance, so I'm going to go with the lowest cost.
BL wrote:How much difference is there between the 2 ERs?
The S&P is .04 and the TSM is .15
Silly Wabbit wrote:The TSM investor shares in the 401k should get converted to admiral shares once the plan hits the minimum balance (10k), no?

Hitting the 10k mark should be easy for a company plan. Is this a small company? Was TSM newly added?
I don't think the fund will switch to admiral shares. It's a fairly new company, but just hit 100 employees, so not super small either.
selters wrote:Would you pay 0.59% for Vanguard Extended Market Index Fund if it was available? Because that's essentially what you're doing if you choose TSM Investor Shares. If Extended Market is 20% of TSM and S&P 500 is 80% of TSM, then the expense ratio of an Extended Market Index Fund would have to be 0.59% for the weighted expense ratio of that portfolio to be 0.15%.

Extended Market contribution to weighted average expense ratio: 0.20x0.59=0.118
S&P 500 contribution to weighted average expense ratio: 0.80x0.04=0.032
Total weighted average expense ratio of portfolio: 0.118+0.032=0.15
Thanks for doing this analysis. I didn't realize how expensive it is just for those mid and small caps!
triceratop wrote:
InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
Have you considered using S&P500 Admiral (VFIAX) in your 401k and Vanguard Extended Market Index Fund Admiral Shares (VEXAX) in your Roth? The correct proportion is about 19% Extended Market. This allows you to have full diversification and the lowest cost.
Thanks for pointing this out. I didn't know such a fund existed. I think I prefer not adding another fund to the mix. Right now I am only looking at TSM or S&P 500 for my equity allocation.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by Silly Wabbit » Tue Jul 04, 2017 1:51 pm

InKirkWeTrust wrote:
Silly Wabbit wrote:The TSM investor shares in the 401k should get converted to admiral shares once the plan hits the minimum balance (10k), no?

Hitting the 10k mark should be easy for a company plan. Is this a small company? Was TSM newly added?
I don't think the fund will switch to admiral shares. It's a fairly new company, but just hit 100 employees, so not super small either.
Reach out to your plan administrator. My plan, also with Vanguard, has a mixture of institutional and admiral fund share classes. I'd always assumed this was based on holdings of the fund in the plan.

Maybe they just need a nudge to make the switch.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by jimb_fromATL » Tue Jul 04, 2017 2:45 pm

Several comments in this thread make it look to me like some folks may be thinking this is only about the difference between the cost of admiral shares and investor shares of the same fund.

It's not. Just to make sure everybody is talking about apples,

VFIAX is admiral shares of the S&P 500 index corresponding to VFINX ... with 500 stocks with the lower expense ratio.

VTSMX is the Total Stock Market with 3500+ stocks and a slightly higher -- but still very low -- expense ratio.

Seems to me that the prospects for spreading your risk (and reward) out over a much larger base, and how that has fared for total return in the last couple of crashes and recoveries would more a lot more important in the decision process than just the expense ratio.

HERE is an older thread discussing them.

A look at several sources show that -- while it's not a hekkuvva lot of difference -- having more diversity in VTSMX (Total Stock Market) has more than made up for its higher expense ratio compared to VFIAX (S&P500)

According to PorfolioVisualizer for contributions of $400 per month since 2000:

VFIAX would have grown to $214,152 
VTSMX would have grown to $217,621 
That's 1.62% better despite the higher expense.

Using Yahoo yearly total performance data that I happen to have on hand also shows VTSMX outperforming the S&P 500 even with the higher expenses. This is for a lump sum and for $5500 per year contributions at the beginning of each year:

16 years 2001 - 2016

VFIAX: 16 yr lump sum APY= 5.3997%; $10,000 lump 16 years = $23,197.
DCA APY= 8.6872%; $5500/yr 16yr = $192,113.

VTSMX: 16 yr lump sum APY= 5.9742%; $10,000 lump 16 years = $25,305.
DCA APY= 8.9464%; $5500/yr 16yr = $196,858.

From what I see, I think I'd choose VTSMX -- the total market. Lacking a working crystal ball, I see no reason to expect 500 stocks to ride out the future any better compared to how the 3500+ stocks have done through the last two crashes and recoveries.

jimb

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by Vanguard Fan 1367 » Tue Jul 04, 2017 3:15 pm

jimb_fromATL wrote:Several comments in this thread make it look to me like some folks may be thinking this is only about the difference between the cost of admiral shares and investor shares of the same fund.

It's not. Just to make sure everybody is talking about apples,

VFIAX is admiral shares of the S&P 500 index corresponding to VFINX ... with 500 stocks with the lower expense ratio.

VTSMX is the Total Stock Market with 3500+ stocks and a slightly higher -- but still very low -- expense ratio.

Seems to me that the prospects for spreading your risk (and reward) out over a much larger base, and how that has fared for total return in the last couple of crashes and recoveries would more a lot more important in the decision process than just the expense ratio.

HERE is an older thread discussing them.

A look at several sources show that -- while it's not a hekkuvva lot of difference -- having more diversity in VTSMX (Total Stock Market) has more than made up for its higher expense ratio compared to VFIAX (S&P500)

According to PorfolioVisualizer for contributions of $400 per month since 2000:

VFIAX would have grown to $214,152 
VTSMX would have grown to $217,621 
That's 1.62% better despite the higher expense.

Using Yahoo yearly total performance data that I happen to have on hand also shows VTSMX outperforming the S&P 500 even with the higher expenses. This is for a lump sum and for $5500 per year contributions at the beginning of each year:

16 years 2001 - 2016

VFIAX: 16 yr lump sum APY= 5.3997%; $10,000 lump 16 years = $23,197.
DCA APY= 8.6872%; $5500/yr 16yr = $192,113.

VTSMX: 16 yr lump sum APY= 5.9742%; $10,000 lump 16 years = $25,305.
DCA APY= 8.9464%; $5500/yr 16yr = $196,858.

From what I see, I think I'd choose VTSMX -- the total market. Lacking a working crystal ball, I see no reason to expect 500 stocks to ride out the future any better compared to how the 3500+ stocks have done through the last two crashes and recoveries.

jimb

Either way the original poster sure is going to be ahead of using some financial advisors. I have 2 friends who are with a commonly discussed investment advisor. One way or another this investment advisor seems to take a one to two percent cut out of the assets under management plus sometimes sells load funds.

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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by ruralavalon » Wed Jul 05, 2017 1:59 pm

triceratop wrote:
ruralavalon wrote:
InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
This is about as close to a tie as it's possible to get. I cannot think of a good reason to prefer one over the other.
I can. It is more expensive. Over a 40 year investing career with a 5% growth rate you will have 4.3% more money with a lower expense fund. Since the OP can access Vanguard Extended Market in their IRA, which was created specifically for this purpose, they can achieve full diversification for minimum cost. Of course it probably won't matter too much if they opt for the higher expense fund but it's clear IMO that this is not a tie.
I was thinking in terms of the actual performance of Vanguard 500 Index Fund Admiral Shares (VFIAX) compared to the actual performance of Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Over the 25 years since the total market fund was created, those share classes of those two funds have had almost identical performance. Morningstar, "Growth of $10k" graph, VTSMX vs VFIAX.

It appears that the benefit from the 0.11% lower expense ratio of VFIAX was cancelled out by a small benefit from the additional diversification of VTSMX. In fact the investor shares of the total market fund slightly outdid the admiral shares of the S&P 500 fund ($99.0k vs $97.9k). The difference was tiny (an extra $1.1k/25 yrs = $44/yr average; an extra 1.1%/25 = 0.04%/yr average), so I characterized it "as close to a tie as it's possible to get".

Of course the next 25 years may be different, the results reversed.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by triceratop » Wed Jul 05, 2017 3:18 pm

ruralavalon wrote:
triceratop wrote:
ruralavalon wrote:
InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
This is about as close to a tie as it's possible to get. I cannot think of a good reason to prefer one over the other.
I can. It is more expensive. Over a 40 year investing career with a 5% growth rate you will have 4.3% more money with a lower expense fund. Since the OP can access Vanguard Extended Market in their IRA, which was created specifically for this purpose, they can achieve full diversification for minimum cost. Of course it probably won't matter too much if they opt for the higher expense fund but it's clear IMO that this is not a tie.
I was thinking in terms of the actual performance of Vanguard 500 Index Fund Admiral Shares (VFIAX) compared to the actual performance of Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Over the 25 years since the total market fund was created, those share classes of those two funds have had almost identical performance. Morningstar, "Growth of $10k" graph, VTSMX vs VFIAX.

It appears that the benefit from the 0.11% lower expense ratio of VFIAX was cancelled out by a small benefit from the additional diversification of VTSMX. In fact the investor shares of the total market fund slightly outdid the admiral shares of the S&P 500 fund ($99.0k vs $97.9k). The difference was tiny (an extra $1.1k/25 yrs = $44/yr average; an extra 1.1%/25 = 0.04%/yr average), so I characterized it "as close to a tie as it's possible to get".

Of course the next 25 years may be different, the results reversed.
But I wanted to compare VTSMX to VFIAX+VEXMX, not strictly to VFIAX. The former will underperform the latter and the OP has the ability to invest in it. I'm not sure how you took me to mean I wanted to compare VTSMX to VFIAX.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by ruralavalon » Wed Jul 05, 2017 6:01 pm

triceratop wrote:
ruralavalon wrote:
triceratop wrote:
ruralavalon wrote:
InKirkWeTrust wrote:My company's 401k offers the S&P 500 index admiral shares (VFIAX) and Total Stock Market investor shares (VTSMX). Which would you choose and why? I have TSM admiral shares in my Roth. Should I go for the lowest ER or most diversification? Thanks!
This is about as close to a tie as it's possible to get. I cannot think of a good reason to prefer one over the other.
I can. It is more expensive. Over a 40 year investing career with a 5% growth rate you will have 4.3% more money with a lower expense fund. Since the OP can access Vanguard Extended Market in their IRA, which was created specifically for this purpose, they can achieve full diversification for minimum cost. Of course it probably won't matter too much if they opt for the higher expense fund but it's clear IMO that this is not a tie.
I was thinking in terms of the actual performance of Vanguard 500 Index Fund Admiral Shares (VFIAX) compared to the actual performance of Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Over the 25 years since the total market fund was created, those share classes of those two funds have had almost identical performance. Morningstar, "Growth of $10k" graph, VTSMX vs VFIAX.

It appears that the benefit from the 0.11% lower expense ratio of VFIAX was cancelled out by a small benefit from the additional diversification of VTSMX. In fact the investor shares of the total market fund slightly outdid the admiral shares of the S&P 500 fund ($99.0k vs $97.9k). The difference was tiny (an extra $1.1k/25 yrs = $44/yr average; an extra 1.1%/25 = 0.04%/yr average), so I characterized it "as close to a tie as it's possible to get".

Of course the next 25 years may be different, the results reversed.
But I wanted to compare VTSMX to VFIAX+VEXMX, not strictly to VFIAX. The former will underperform the latter and the OP has the ability to invest in it. I'm not sure how you took me to mean I wanted to compare VTSMX to VFIAX.
Sorry, I misunderstood your post ("4.3% more money with a lower expense fund") as comparing VFIAX and VTSMX.

If you add VEXMX in an IRA at an expense ratio of 0.21%, then you dilute or eliminate the expense ratio advantage of using VFIAX in the 401k. But mimicking a total market fund historically would have gained just 0.04%/yr in returns over VFIAX by itself.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by triceratop » Wed Jul 05, 2017 6:03 pm

I made a mistake too. :oops: I meant VEXAX, the admiral shares Extended Market Index, which costs only 0.08%.
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Re: S&P 500 Admiral vs TSM Investor Shares in 401k

Post by White Coat Investor » Wed Jul 05, 2017 6:14 pm

Vanguard Fan 1367 wrote:I have had great success with my S & P 500 fund in my 401K. The selections aren't very good in my 401K but I am grateful that I have the 500 fund. It has been a significant part of my investing success. My ER in that fund is .87 percent. Most other options are higher ERs.

The .04 expense ratio is fabulous of the 500 fund you are offered. At the same time I would have no trouble at all paying the investor share price of .15 percent for the Total Stock Market. Either way Vanguard is charging almost nothing to let you enjoy whatever investment returns the market will give you. (Paraphrase of St. Jack).

I would probably go with the 500 fund due to the slightly lower ER.
Ooh, that's a tough call. A 500 fund with a 0.04 ER or a TSM fund with a 0.15% ER. I prefer TSM, but I'm not willing to pay much more for it. 11 basis points would be pushing it.
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