401k- What to do with high expense funds?

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macd42389
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401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 11:27 am

I've recently started looking more into my investments and have some questions on what to do with my 401k.
The 401k is through Prudential and my employer matches my contributions up to 3.5%. I contribute 8%.
I've had the account open around 4 years and I'm 28 years old.

Originally when I signed up for the plan I enrolled in something called Prudential GoalMaker. Basically they asked you a bunch of questions about yourself (age, risk tolerance, etc.) then based on that they would automatically invest your contributions/manage your portfolio for you. This seemed easy at the time but now I've realized that a lot of the funds they've selected have high expense ratios.

About 6 months ago I turned off GoalMaker and I've changed it so all future contributions go into a fund called Dryden S&P 500 Index Fund. It was the only index fund they offered. My question now is what should I do with my current holdings...should I sell off all my other assets and transfer them all to the index fund. Or should I hold everything and stick to just contributing only to the Index fund from here on out.

Here are my current 401k holdings. Total value is ~$33,000

Large Cap Value / LSV Asset Management (Expense Ratio: 0.62%)
15.9%

Dryden S&P 500 Index Fund (Expense Ratio: 0.04%) (All future contributions are currently set to go into this fund)
11.6%

Large Cap Growth / Jennison Fund (Expense Ratio: 0.62%)
17.5%

Small Cap Value / Ceredex Fund (Expense Ratio: 0.95%)
10.4%

Small Cap Growth / TimesSquare Fund (Expense Ratio: 0.90%)
11.3%

Dodge & Cox International Stock (Expense Ratio: 0.64%)
33.3%

As far as other investments I have outside my 401k (to get a better picture of total investment allocations).
~$19,000 in a Roth IRA through Vanguard (68% in VFFVX, 32% in VTSMX)
~$6,500 in a non tax advantaged brokerage account through Vanguard (52% in VGTSX, 48% in VTSMX)
~$3,000 in an HSA (not yet invested, acct charges $2.90/mo. to invest debating if that is worth it)
~$7,500 in a pension plan
~$10,000 emergency fund
~$21,000 sitting in an online savings acct (saving for a down deposit on a house eventually)

Overall I guess my main question is about either holding or selling off those high expense funds...but also any other general investment / personal finance advice regarding my current position would be appreciated!

Let me know if any other details would be helpful. Thanks!

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flamesabers
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Re: 401k- What to do with high expense funds?

Post by flamesabers » Wed Jul 05, 2017 11:39 am

I would say transfer all of your 401k funds into the index fund. Since it's in a tax-advantaged account, you don't have to worry about any potential tax liabilities. The less time you have money in those higher ER funds, the better.

As soon as I got an index fund in my 401k, I transferred all of my old fund into the index fund.

alex_686
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Re: 401k- What to do with high expense funds?

Post by alex_686 » Wed Jul 05, 2017 11:45 am

I will mostly second flamesabers advice.

I do have 2 comments. What is your bond allocation and what is your international stock allocation? The expense ratio on Dodge & Cox International Stock is not great but it is not horrible. If you can meet your asset allocation in another account - such as a IRA or Roth IRA - than great. If not I would consider your 401k options. Not recommending them - not jumping up and down - but I think you should consider them.

pingo
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Re: 401k- What to do with high expense funds?

Post by pingo » Wed Jul 05, 2017 12:19 pm

I'd also consider Dodge & Cox International, if you're unable to obtain your international allocation for the whole portfolio in an account with lower cost options.

I'm also in favor of ditching the high cost growth and value funds. They have to beat the S&P 500 index fund by 0.58% to 0.90%-ish every single year just to break even with the index fund. That's hard to do. Besides, the S&P 500 tracks the growth and value stocks of the U.S. stock market without their help, but it also includes the ones that aren't as extreme in the spectrum that can be just as valuable.

Jack FFR1846
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Re: 401k- What to do with high expense funds?

Post by Jack FFR1846 » Wed Jul 05, 2017 12:37 pm

I'm going to cite the Jack FFR1846 rule with respect to balances under $100k total. "It doesn't matter" what AA you currently have. Until your invested amount exceeds $100k, it's absolutely fine to throw it all into stock funds. That 0.04% is a screaming flag saying "invest it all here". As you get more into your Roth or taxable, don't sweat it. And yes, of course, lose all those high ER funds and put it all in the 0.04% one.
Bogle: Smart Beta is stupid

macd42389
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Re: 401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 12:41 pm

alex_686 wrote:I will mostly second flamesabers advice.

I do have 2 comments. What is your bond allocation and what is your international stock allocation? The expense ratio on Dodge & Cox International Stock is not great but it is not horrible. If you can meet your asset allocation in another account - such as a IRA or Roth IRA - than great. If not I would consider your 401k options. Not recommending them - not jumping up and down - but I think you should consider them.
I'm not sure if there's a program available or easier way to calculate your overall bond/international stock allocation across all your investment accounts but I tried to manually calculate it and came up with this ballpark figure.....

Currently I have ~ 32% in international stocks and very little in bonds ~2%.

Based off what you said I could use my Roth IRA to manage my international stock allocations and supplement this with the 401k Dodge & Cox fund (international) if need be. Other than that I probably should transfer all of my other 401k holdings to the index fund?

pingo
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Re: 401k- What to do with high expense funds?

Post by pingo » Wed Jul 05, 2017 12:46 pm

Wait a second...we don't actually know what funds are available in your 401k other than what you listed in the portfolio Prudential suggested.

What other funds are available?

alex_686
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Re: 401k- What to do with high expense funds?

Post by alex_686 » Wed Jul 05, 2017 1:08 pm

macd42389 wrote:Based off what you said I could use my Roth IRA to manage my international stock allocations and supplement this with the 401k Dodge & Cox fund (international) if need be. Other than that I probably should transfer all of my other 401k holdings to the index fund?
Back of the envelope calculations are fine. You should have a tolerance band of around 5% to 15% so small errors are not going to be that important.

Yes, this is a excellent way to do this. If you are going 100% stocks. I like bonds. I think all portfolios should have a heft slug of bonds in them. But that would be a different conversation.

selters
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Re: 401k- What to do with high expense funds?

Post by selters » Wed Jul 05, 2017 1:47 pm

Yes, just move it all to the Dryden S&P 500 Index Fund. And compensate for the loss of international in the 401k by buying some Total International in the Roth IRA. Or you could go for the Three-fund portfolio in the Roth IRA. For maximum simplicity just go 100% Target Retirement Date Fund in the Roth IRA.
Last edited by selters on Wed Jul 05, 2017 2:39 pm, edited 2 times in total.

Thesaints
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Re: 401k- What to do with high expense funds?

Post by Thesaints » Wed Jul 05, 2017 1:57 pm

You may want to keep the international fund, if that is your only option for foreign investing.

macd42389
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Re: 401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 2:04 pm

pingo wrote:Wait a second...we don't actually know what funds are available in your 401k other than what you listed in the portfolio Prudential suggested.

What other funds are available?
So other than the funds I mentioned above these are the only other options.

Core Bond Enhanced Index / PGIM Fund (Expense Ratio 0.27%)
Mid Cap Value Fund (sub-advised by Wellington Management) (Expense Ratio 0.83%)
Mid Cap Growth / Artisan Partners Fund (Expense Ratio 0.82%)

retiredjg
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Re: 401k- What to do with high expense funds?

Post by retiredjg » Wed Jul 05, 2017 2:35 pm

I'd use the 500 index and the core bond fund. The international fund is not great but certainly OK. Or you can hold your international in the IRA and the taxable account if there is enough space.

Don't just change your future contributions. Change it all to just the low cost funds.

macd42389
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Re: 401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 2:53 pm

Do I need to worry about timing at all? I feel like the answer is no due to my investment timeline being long term but I can't help but ask before I transfer ~$18,000 into the Dryden S&P 500 Index Fund.

Looks like the fund is up 9.6% YTD and 17.8% in the last year. Do I wait for a dip or just go for it now?

Thesaints
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Re: 401k- What to do with high expense funds?

Post by Thesaints » Wed Jul 05, 2017 2:58 pm

You are not transferring from cash, but from other domestic stock funds. There is basically no timing risk involved.

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ruralavalon
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Re: 401k- What to do with high expense funds?

Post by ruralavalon » Wed Jul 05, 2017 3:00 pm

Welcome to the forum :) .


Questions.
Do you have any debt, if so what types, amounts and interest rates?

What is your tax bracket, both federal and state?

What is your tax filing status?

About how much (in dollars) do you think that you might be able to contribute to investing annually (total, all accounts)?

How much (in dollars) is the maximum employer match in your 401k?


Asset allocation.
At age 28 I suggest about 20% in bonds. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, "Never bear too much or too little risk", and "Asset allocation".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6).

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.


Fund selection.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

It is often best to look at all accounts together as a single unified whole, rather than consider each account separately. Start fund selection by choosing only the one or two best funds (diversified + low ER) in the work-based accounts, where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited choices available in the IRA and taxable account.

For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund ( such as Dryden S&P 500 Index Fund in your 401k) is good enough for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations". An S&P 500 index fund covers 80% of the U.S. stock market, and in the 25 years since the creation of the first total stock market fund the performance of the two types of funds has been almost identical. Morningstar “growth of $10k” graph, VFINX vs VTSMX. See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically added little in performance.


Funding priority.
Here is a general account funding priority that often works well for many people:
1) Contribute to the work-based plans (401k, 403b, 457, TSP) enough to get the full employer match (the match is like free money, your best possible investment);
2) pay off any high interest debt;
3) fund the HSA;
4) Contribute the maximum to an IRA for each spouse, traditional or Roth, depending on eligibility and personal circumstances;
5) Contribute the remainder of the maximum employee contribution to the 401ks; and
6) Contribute to a taxable investing account.
Please see the wiki article "Prioritizing investments".



Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401k. Current portfolio size = $58.5k. The asset allocation is: 20% bonds; 20% international stocks; and 60% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.

Taxable account @ Vanguard (11% of current total portfolio; $6.5k)
05%, $3.1k, Vanguard Total Stock Market index Fund Investor Shares (VTSMX) ER 0.15%
06%, $3.4k, Vanguard Total International index Fund Investor Shares (VGTSX) ER 0.18%

401k (56% of current total portfolio; $33k)
56%, $33k, Dryden S&P 500 Index Fund ER 0.04%
00%. $00k, Dodge & Cox International Fund (DODFX) ER 0.64%

Roth IRA @ Vanguard (32% of current total portfolio; $19k)
12%, $3.4k, Vanguard Total International index Fund Investor Shares (VGTSX) ER 0.18%
20%, $11.7k, Vanguard Total Bond Market index Fund Admiral Shares (VBTLX) ER 0.05%


Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every year or two to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the stock/bond allocation by exchanging between funds inside the Roth IRA.

You can adjust the international/domestic allocation by how you invest any new money in the taxable account, or you could add Dodge & Cox International Fund (DODFX) ER 0.64% in your 401k. Avoid exchanging between funds in the taxable account, which can create income tax liability.


. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews".

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: 401k- What to do with high expense funds?

Post by retiredjg » Wed Jul 05, 2017 3:50 pm

macd42389 wrote:Do I need to worry about timing at all?
No. This is simply a sideways move from one bunch of stocks to another. They largely all go up and down together.

macd42389
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Re: 401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 4:15 pm

Really appreciate the detailed response....I will take some time to look through it completely but here are some quick answers to some of those questions.

-Currently have no outstanding debt other than month to month credit card expenses but those get paid in full each month. Previously had around $24,000 in student loans but those have been paid off fortunately.

-As far as tax bracket...my effective tax rate is right around 24%. I believe that comes out to around 21% Federal and 3% State.

-My tax filing status is Single

-As far as total yearly investment amounts I'm estimating around $21,000 split out between these accounts.
~$5,250 personal contribution to 401k
~$2,300 employer match to 401k
~$3,400 contribution to HSA (this fund will be invested shortly)
~$5,500 contribution to Roth IRA
~$5,000 contributed to taxable brokerage account

-For the 401k match my company matches 100% up to the first 1% contribution then matches 50% of the next 2-6% contribution if that makes sense. So to get the full match I need to contribute 6% and then my company will essentially match 3.5% total. Last year I contributed 8% and the company matched a total of $2,300.

My company also contributes 3% of salary to a pension plan but I don't think that counts for what you were asking.

One thing that I might be doing wrong after looking at your "funding priority" list is maybe I should be maxing out my 401k contributions before buying funds in the taxable brokerage account. I guess the main reason I haven't done this is I'm trying to save for a down deposit on a house eventually and I guess I don't feel totally comfortable tying up so much in my 401k (I see the brokerage account as more liquid). Probably not the best way to go about it but that's my thought process at least.

retiredjg
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Re: 401k- What to do with high expense funds?

Post by retiredjg » Wed Jul 05, 2017 4:25 pm

You should not save retirement money in a taxable account unless you have filled all your available tax-advantaged accounts.

This does not apply to things like a home down payment.

alex_686
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Re: 401k- What to do with high expense funds?

Post by alex_686 » Wed Jul 05, 2017 4:34 pm

First, I would try to max out your 401k up to the 6%. Your employer's contribution is in effect an instant 50% return on your money invested. It is hard to find a better risk free return out there. I would pinch pennies to get this.
retiredjg wrote:You should not save retirement money in a taxable account unless you have filled all your available tax-advantaged accounts.

This does not apply to things like a home down payment.
I would disagree. Any contribution towards a Roth can be withdrawn at any time without a penalty. So stuff that Roth. Contributions can go towards the down payment, returns on those contributions can go towards retirement.

retiredjg
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Re: 401k- What to do with high expense funds?

Post by retiredjg » Wed Jul 05, 2017 4:43 pm

alex_686 wrote:I would disagree. Any contribution towards a Roth can be withdrawn at any time without a penalty. So stuff that Roth. Contributions can go towards the down payment, returns on those contributions can go towards retirement.
If I understood correctly, this poster is already maxing out the Roth IRA for retirement purposes. So it does not make sense to put house money there in this case.

alex_686
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Re: 401k- What to do with high expense funds?

Post by alex_686 » Wed Jul 05, 2017 5:05 pm

retiredjg wrote: If I understood correctly, this poster is already maxing out the Roth IRA for retirement purposes. So it does not make sense to put house money there in this case.
I apologize. I interpreted your post strictly as a stand alone item.

macd42389
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Re: 401k- What to do with high expense funds?

Post by macd42389 » Wed Jul 05, 2017 5:56 pm

Yeah so just to clarify I do max my Roth IRA and HSA every year in addition to contributing 8% to the 401k. I guess this is now more of a question on how to best "manage" my house down payment savings. At the beginning of this year I had about $25,000 sitting in a savings account (house savings), not including $10,000 emergency fund, yielding next to no interest. I then decided to invest around $6,500 of that into the brokerage account thinking that if need be later on I could withdraw that money (or the same amount from my Roth IRA) to pitch in for the house.

One reason I'm a little indecisive is because I'm unsure of my exact time frame in purchasing in a house. I'd say at this point though it will be within the next 5 years.

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ruralavalon
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Re: 401k- What to do with high expense funds?

Post by ruralavalon » Wed Jul 05, 2017 6:08 pm

macd42389 wrote:Yeah so just to clarify I do max my Roth IRA and HSA every year in addition to contributing 8% to the 401k. I guess this is now more of a question on how to best "manage" my house down payment savings. At the beginning of this year I had about $25,000 sitting in a savings account (house savings), not including $10,000 emergency fund, yielding next to no interest. I then decided to invest around $6,500 of that into the brokerage account thinking that if need be later on I could withdraw that money (or the same amount from my Roth IRA) to pitch in for the house.

One reason I'm a little indecisive is because I'm unsure of my exact time frame in purchasing in a house. I'd say at this point though it will be within the next 5 years.
For the rest of that cash savings for buying a home in the next 5 years, consider a short-term bond fund, federally insured savings account or federally insured short-term CDs. For comparison of rates, please see http://www.bankrate.com .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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