Need help balancing 401k options and Roth IRA

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Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Need help balancing 401k options and Roth IRA

Postby Quisted » Sun Jul 16, 2017 6:55 pm

Hi all,

I've been doing a lot of reading through the forums for information about saving and building a portfolio for retirement while I'm still young and can truly take advantage of many years of growth. I'm currently 26 and anticipating being able to retire in 2060. I'm running into the issue where my employer's 401k options (with a match up to 3%) are seeming less than ideal and have rather high expense rations. I opened a Roth IRA through vanguard a couple years ago and currently have those assets in a target date fund. I've listed out my current investments below as well as the options my employer provides for the 401k and would really appreciate some advice on how to balance the two.

From what I've read on these forums, it seems that using a target date fund for both the 401k and Roth IRA is highly discouraged but I'm unsure how to fully take advantage of the Fidelity options provided to me via my employer. I'm a fan of either "lazy" or "target date" portfolios, buying into the idea that simplicity is one of the best strategies for someone like myself that doesn't have extensive or professional level knowledge on the subject. So thank you again in advance for any feedback and advice that you can provide.

Current Investments/Debt

Roth IRA
Vanguard Target Retirement 2060 Fund (VTTSX): $15,063
Expense Ratio: 0.16%

Employer 401k (Fidelity)
Employer Match: 3%
Dreyfus S&P 500 INDX (PEOPX): $5,916
Expense Ratio: 0.51%

Cash
Savings Account: $7,916

Current Debt
Student Loans: $7,034
Interest Rate: 3.17%


Available Fidelity 401k Fund Choices

DREYFUS S&P 500 INDX (PEOPX) 0.51%
FKLN DYNATECH R (FDNRX) 1.17%
INVS COMSTOCK R (ACSRX) 1.11%
MFS RESEARCH R2 (MSRRX) 1.07%
OPPHMR DISC MDCPGR R (OEGNX) 1.40%
VICTORY S ESTB VAL R (GETGX) 1.13%
FKLN SM CAP GRTH R (FSSRX) 1.39%
VICTORY S SM CO OP R (GOGFX) 1.48%
MFS INTL NEW DISC R2 (MIDRX) 1.58%
OPPHMR DEV MKTS R (ODVNX) 1.57%
OPPHMR INTL GRTH R (OIGNX) 1.38%
TEMPLETON FOREIGN R (TEFRX) 1.47%
FA REAL ESTATE M (FHETX) 1.33%
FA FREEDOM 2005 M (FFTVX) 0.99%
FA FREEDOM 2010 M (FCFTX) 1.03%
FA FREEDOM 2015 M (FFVTX) 1.08%
FA FREEDOM 2020 M (FDTFX) 1.12%
FA FREEDOM 2025 M (FTTWX) 1.16%
FA FREEDOM 2030 M (FTFEX) 1.20%
FA FREEDOM 2035 M (FTTHX) 1.25%
FA FREEDOM 2040 M (FTFFX) 1.25%
FA FREEDOM 2045 M (FFFTX) 1.25%
FA FREEDOM 2050 M (FFFQX) 1.25%
FA FREEDOM 2055 M (FHFTX) 1.25%
FA FREEDOM 2060 M (FDKTX) 1.25%
FA FREEDOM INC M (FTAFX) 0.97%
JH STR INCOME OPP R2 (JIPPX) 1.20%
JPM CORE BOND R2 (JCBZX) 1.16%
LD ABT HIGH YIELD R3 (LHYRX) 1.18%
FID GOVT MMKT DM (FZBXX) 0.72%

mhalley
Posts: 4709
Joined: Tue Nov 20, 2007 6:02 am

Re: Need help balancing 401k options and Roth IRA

Postby mhalley » Sun Jul 16, 2017 8:13 pm

I would not say a tr fund is discouraged here that much, it is just that in general you can roll your own for a lower er. In your case, you can't, so having all your 401k in the s&p is fine. I think your portfolio is fine, but if you want to add something like intl or small cap you could use your Roth for that instead of the tr fund.
As your portfolio grows you might want to branch out further. But with your 491k the s&p should be the majority of your portfolio.

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Mon Jul 17, 2017 3:08 pm

Thanks for the feedback, I was under the impression that using a target date fund for both would be ill-advisable so maybe I can look into a variety of 3-4 fund portfolios that can be built across the 401k and Roth IRA.

If the S&P index fund is going to comprise the bulk like you suggested, perhaps building the other components individually through the vanguard Roth IRA is a better option than leaving that one with the target date fund as one can argue I'm not getting any additional exposure, and from what I've read around here, I may be exposing myself to greater risk.

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Mon Jul 17, 2017 3:23 pm

I agree it is not highly discouraged to have a target fund in each account. But to do so with your choices will cost more.

Your 401k is not great. I think it is mostly because your employer is passing on the admin costs to you. Perhaps they could not afford to pay both the admin costs and give you a 3% match. The match will certainly make up for some or all of the higher ER.

The solution for you may be finding a stable value fund in your plan. It might be called a "guaranteed income" fund and it may be listed in a separate place from the mutual funds.

You have already found the best choice in your 401k and you should use it. Also use Roth IRA. Will you have more money to save after that?

How does the match work? How much do you have to contribute to get the entire 3%?

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Mon Jul 17, 2017 3:54 pm

Thanks for your response, retiredjg

Unfortunately those are all the funds that are offered within our plan so it doesn't look like the stable value fund is an option.

As far as the match, my employer will match my contributions dollar for dollar up to 3% of my paycheck and employees must stay for at least 3 years to become fully vested. Saving enough to meet the employer match and max out the IRA won't be an issue and I should still be able to contribute to the 401k but maxing it out may not be feasible.

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Mon Jul 17, 2017 4:01 pm

Is it likely you will stay the 3 years?

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Mon Jul 17, 2017 4:38 pm

Yes, I've been here about two years already.

I'd only been contributing the 3% for the match into the 401k before now and everything else was going into the Roth

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Tue Jul 18, 2017 7:42 am

Your current approach is not a bad one if your goal is to have something less than 10% bonds in your portfolio.

What is your desired stock to bond ratio? How much (in dollars) will you save in each account each year? For the 401k, include the match.

Are you now at a point where you can and want to save more for retirement? If so, the (distasteful) answer is to put more in the 401k.

bayview
Posts: 1187
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Need help balancing 401k options and Roth IRA

Postby bayview » Tue Jul 18, 2017 8:11 am

Quisted wrote:Yes, I've been here about two years already.

I'd only been contributing the 3% for the match into the 401k before now and everything else was going into the Roth

To be clear, is it three years of employment period, or three years since contributing to the 401k?
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Tue Jul 18, 2017 1:28 pm

bayview wrote:
Quisted wrote:Yes, I've been here about two years already.

I'd only been contributing the 3% for the match into the 401k before now and everything else was going into the Roth

To be clear, is it three years of employment period, or three years since contributing to the 401k?


Hi bayview, it's 3 years of employment

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Tue Jul 18, 2017 2:19 pm

retiredjg wrote:Your current approach is not a bad one if your goal is to have something less than 10% bonds in your portfolio.

What is your desired stock to bond ratio? How much (in dollars) will you save in each account each year? For the 401k, include the match.

Are you now at a point where you can and want to save more for retirement? If so, the (distasteful) answer is to put more in the 401k.


I'm open to advice and suggestions but I feel I'm in a place to afford the greater risk of a 90/10 stocks/bonds allocation, shifting to an 80/20 once I am 30.

As far as saving in each account per year, I've listed them below:
Roth IRA: $5,500
401k (Including match): $13,400

Some additional information as I continue to think about this more, I will be looking to make a down-payment on a house in approximately 5 years. At this point my best estimate is that the value of the home when we look to buy will be in the $250k - $350k range but much will depend on the work situation for myself and my girlfriend. Currently, she does not hold any investments but has about $10,000 in savings. At 20% down this is potentially up to $70,000 down, and a higher percentage would be even better.

It's a lot to think about but I want to put the effort in now to create an investing plan that can take advantage of starting early, keep us living within our means and provide a strong basis for retirement. So thank you again for all the input so far.

niners9088
Posts: 45
Joined: Mon Jul 07, 2014 9:50 am

Re: Need help balancing 401k options and Roth IRA

Postby niners9088 » Tue Jul 18, 2017 2:30 pm

I think you are doing the best right now with what you have.

Once your Roth balance gets high enough can move it into an Admiral fund to further lower your ER and then start adding more funds as the balance grows.

Typically the thought is to keep assets with high expected returns in your Roth (if you don't discount your 401k for taxes) since you already paid taxes on them. With the high ERs in the 401k I'm not sure I would add bonds there. Most of the return would be a wash with an ER of 1%.

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Tue Jul 18, 2017 3:27 pm

What you have right now is ballpark 7% bonds and in less than a year, it will be down to about 5% in bonds. So you need to change something.

To maintain 10% in bonds, you can either switch to a target fund that has more bonds, or split the target fund into bonds, Total Stock and Total International Index. The latter suggestion is the more long lasting one and the costs are a little less.

If you wish to use mutual funds instead of ETFs, you'd have to start with about 15% in bonds because of the $3k minimum to buy a bond fund. That is not an unreasonable amount of bonds, even for a young person. In fact, I'd suggest that 20% in bonds is a better number than 10% but it has been so long since the last market crash that people don't really listen to that suggestion any more.

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Wed Jul 19, 2017 6:11 pm

Okay, so after considerably more reading and playing around with some models I built in excel, I've established that I can create a portfolio that looks like the example below in order to obtain an 80/20 stock to bond ratio with a 67/33 split of stocks between domestic and international respectively:

401k
Available Funds = $5,919.19

Dreyfus S&P 500 Index (PEOPX): $5,919.19

Roth IRA
Available Funds = $15,151.41

Vanguard Total Stock Market Index (VTSMX): $5,374.65
Vanguard Total International Stock Index (VGTSX): $5,562.64
Vanguard Total Bond Market Index (VBMFX): $4,214.12


If I went with this model I'll clearly need to begin investing primarily into the 401k as domestic stock will comprise the majority of the portfolio and the Roth IRA is limited to $5,500 contributed annually. Ultimately this may pose a challenge to balancing where I wouldn't be able to contribute enough to compensate for the amount going into the 401k and may have to look at a second fund there as well (potentially for international since the ER for bonds is so high?).

Ultimately the goal is to get the Vanguard funds to admiral shares but that could take a few years given the amount that can be contributed. I don't see any issue with re-balancing quarterly or semi-annually, but my only other concern comes down to the S&P Index fund offered in my 401k. The model essentially treats it the same as the Vanguard Total Stock Market Index fund (which would become phased out of the Roth by re-balancing over time) but it lacks exposure to the small and mid-cap market. Given the options of funds in the 401k, any feedback on whether or not there are acceptable funds to balance this with or if I should be looking into taxable accounts would be appreciated. I'd love nothing more than to hear I'm completely off base and making this more complicated than it needs to be but I'm struggling to see other options.

There are some of us at my office lobbying for better investment options but I'm not holding my breath for any changes in the near future. Thanks again for any and all advice that can be provided!

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Thu Jul 20, 2017 7:13 am

Quisted wrote:If I went with this model I'll clearly need to begin investing primarily into the 401k as domestic stock will comprise the majority of the portfolio and the Roth IRA is limited to $5,500 contributed annually. Ultimately this may pose a challenge to balancing where I wouldn't be able to contribute enough to compensate for the amount going into the 401k and may have to look at a second fund there as well (potentially for international since the ER for bonds is so high?).

It's probably the best model you can use with the choices you have.

Yes, ultimately, you'll have to make some adjustments. This could include using a little of one of the high cost international funds in the plan. Or reducing your international allocation to what will fit in the Roth IRA (a small reduction is fine, but I don't suggest going below 20% of the stocks which would be 16% of the portfolio). Or holding some "bonds" in the form of CDs at the bank. Or managing to get your plan to include a stable value fund. Or some combination of the above.

Ultimately the goal is to get the Vanguard funds to admiral shares but that could take a few years given the amount that can be contributed. I don't see any issue with re-balancing quarterly or semi-annually, but my only other concern comes down to the S&P Index fund offered in my 401k.

Yes, admiral shares is good, but at this dollar amount, it is not important at all. Rebalancing once a year or two is fine if you prefer.

The model essentially treats it the same as the Vanguard Total Stock Market Index fund (which would become phased out of the Roth by re-balancing over time) but it lacks exposure to the small and mid-cap market. Given the options of funds in the 401k, any feedback on whether or not there are acceptable funds to balance this with or if I should be looking into taxable accounts would be appreciated.

Many of us like to have the whole market. In reality, the 500 index and the total market perform almost identically. This is one issue you can stop worrying about. And later on, you might be able to add the mid and small caps in an IRA or something.

I'd love nothing more than to hear I'm completely off base and making this more complicated than it needs to be but I'm struggling to see other options.

I think you've got a good handle on what you need to do and how to do it. Your situation is not ideal, but it is common in the 401k world. Things are improving though. Keep in mind that your job is not to have the perfect portfolio (if wishes were horses.....) Your job is to build a good portfolio with the building blocks you have, keeping costs as low as you reasonably can. The most important part is saving enough money and not doing stupid stuff.

Quisted
Posts: 8
Joined: Sun Jul 16, 2017 5:59 pm

Re: Need help balancing 401k options and Roth IRA

Postby Quisted » Fri Jul 21, 2017 11:29 am

Thanks again for all the advice. I'll keep my fingers crossed for some changes in the future but it's reassuring to know that in the meantime I'm doing the best with what's available!

retiredjg
Posts: 29470
Joined: Thu Jan 10, 2008 12:56 pm

Re: Need help balancing 401k options and Roth IRA

Postby retiredjg » Fri Jul 21, 2017 1:54 pm

If you have not seen this, you might find it useful. https://www.bogleheads.org/wiki/How_to_ ... tter_401(k)_plan

Nobody can say if your employer's plan passes muster when it comes to meeting their fiduciary duty to the employees. But planting the seed in their mind that the plan is not up to par might bring some improvement. Simply the addition of a lower cost bond fund or a stable value fund would improve your plan a lot.

An example....When bond funds are paying such a low interest, it is hard to see how a bond fund could make enough to cover or exceed those high costs.

With a stable value fund, you are not particularly interested in the expense ratio. If it pays 2.5%, that is after expenses and that would be be a good choice for you to use.


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