First 401(k)! Need help with fund choices.

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RedClay
Posts: 27
Joined: Mon Mar 13, 2017 10:17 am

First 401(k)! Need help with fund choices.

Post by RedClay » Sat Nov 11, 2017 7:46 pm

Hi everyone! I started my first "real" job recently, and I would like some input on my 401(k) fund choices. Information and questions are below. Thanks!

Emergency funds: 5 months of expenses
Debt: $109k @ 6.3% average (student loans)
Tax Filing Status: Single for 2017, Married Filing Jointly for 2018
Tax Rate: 15% Federal, 3.07% State
State of Residence: PA
Age: 26
Income: $31.5k for 2017 (stub year), $173k for 2018

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 33.3% of stocks

Current retirement assets
$14k - Roth IRA - Vanguard LifeStrategy Growth (0.15% ER) - 80% stocks, 20% bonds.
$800 - HSA - currently not invested, will grow to $3,400 by end of year. I can invest amounts above $2,100. Will have access to Vanguard funds in HSA.

Size of the portfolio: $14,800, see above.

Taxable
None.

His 401k Company match?
None yet. This is my first 401(k). No match.

New annual Contributions
$18,000 his 401k (planned starting in 2018)
$5,500 his Roth IRA
$3,450 his HSA

Available funds

Funds available in his 401(k)
Russell Retirement Fund - Target Date (0.48%)
Russell 2020 Target Date Fund through Russell 2060 TD Fund (average of 0.53%)
Russell Investment Contract Fund (0.30%)
Russell Fixed Income Fund (0.41%)
Russell Inflation Protected Securities Fund (0.28%)
Russell 1000 Index Fund (0.13%)
Russell U.S. Large Cap Equity Fund (0.70%)
Harbor Capital Appreciation (0.70%)
Russell International Equity Index Fund (0.21%)
Russell All International Equity Fund (0.83%)
Russell U.S. Small Cap Equity Fund (0.85%)
Russell Global Real Estate Securities Fund (0.92%)

Questions:
1. I will be in the 15% bracket for 2017, so I am planning to make a Roth 401(k) contribution of $2,000 per paycheck for the last three paychecks of 2017. Is this a good choice, or should I go with the traditional 401(k)? I am planning to switch to the traditional 401(k) for 2018, given my higher income.

2. I want to move towards the three-fund portfolio, but I'm not sure how to most efficiently do this across all accounts. I underlined and italicized the three 401(k) choices that I found most reasonable. Both equity index funds are passive, but the fixed income fund is an actively managed fund at a higher 0.41% ER. How do I allocate funds across the HSA, Roth IRA, and 401(k) to meet my desired asset allocation of 53.33% US stocks, 26.67% international stocks, and 20% US bonds? This is one possible plan: bonds in Roth IRA, international stocks in the rest of Roth IRA and HSA, and then Russell 1000 Index Fund in 401(k).

3. The 401(k) funds have gaps in them. For example, the Russell 1000 Index Fund only covers the top 1,000 stocks, but the Vanguard Total Stock Market Index Fund covers about 3,600 stocks. Should I buy the actively managed Russell U.S. Small Cap Equity Fund (0.85%) to fill the gap? Or would the Vanguard Extended Market Fund be sufficient? Same question for the International Equity Fund. It covers only the develop non-US markets. Should I be worried about adding emerging market exposure?

4. How quickly can I change my 401(k) contribution elections for 2018? If I make the switch from Roth 401(k) contributions to Traditional 401(k) contributions after my last December paycheck, will the changes take effect for my first January 2018 paycheck? I don't want to accidentally make a Roth 401(k) contribution for 2018.

5. With over $100k in debt, is it even smart to max out 401(k), HSA, and Roth IRA? Should I instead focus on paying down debt and then start investing?

Thanks for all of the help!

dbltrbl
Posts: 864
Joined: Thu Mar 01, 2007 11:52 am

Re: First 401(k)! Need help with fund choices.

Post by dbltrbl » Sat Nov 11, 2017 9:19 pm

With no match, Put money in ROTH IRA and attack 173k of Debt. Get it out of way. If match than put up to maximum match.

mega317
Posts: 1097
Joined: Tue Apr 19, 2016 10:55 am

Re: First 401(k)! Need help with fund choices.

Post by mega317 » Sun Nov 12, 2017 12:09 am

I'll take a stab though I can't answer a few of these questions very well.
1. Sounds good to me
2. I will let others give you more definitive advice using math, but at these expense ratios I would probably keep bonds in the 401k. You want the highest expected growth in tax-free and bonds in tax-deferred so RMDs are smaller.
3. I wouldn't worry too much about this. Adding smaller cap stocks may slightly improve your returns, or it might not. Know one will know except in retrospect.
4. This is a question for your HR. The way my plan works, which I believe is standard, is that changes in 401k contribution amounts take effect in a few days. If you change before payroll (I don't know when that is) then it will be reflected on your next check. If after, then you'll have one more paycheck with the old amount.
5. Agree with above. Get any match, then I'd knock out the debt. Nice wiki article on this subject: https://www.bogleheads.org/wiki/Paying_ ... _investing

RedClay
Posts: 27
Joined: Mon Mar 13, 2017 10:17 am

Re: First 401(k)! Need help with fund choices.

Post by RedClay » Mon Nov 13, 2017 2:48 pm

Any other thoughts about choosing the bond fund (ER 0.41%) in the 401k? I'm tempted to just choose the cheapest fund, the Russell 1000 at 0.13%, but the prevailing wisdom seems to have bonds in the 401k.

Another thought I've had is that it will be difficult for me to maintain my AA with the ongoing 401k contributions. Should I set up my biweekly contributions into my 401(k) to match my AA of 53.33% US stocks/26.66% International/20% bonds? I would then keep the Lifestrategy Growth in my Roth IRA until I have larger balances.

Any thoughts are greatly appreciated. Thanks!

RedClay
Posts: 27
Joined: Mon Mar 13, 2017 10:17 am

Re: First 401(k)! Need help with fund choices.

Post by RedClay » Mon Nov 13, 2017 8:43 pm

Bump.

User avatar
Tyler Aspect
Posts: 475
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: First 401(k)! Need help with fund choices.

Post by Tyler Aspect » Mon Nov 13, 2017 9:59 pm

RedClay wrote:
Sat Nov 11, 2017 7:46 pm
Hi everyone! I started my first "real" job recently, and I would like some input on my 401(k) fund choices. Information and questions are below. Thanks!

Emergency funds: 5 months of expenses
Debt: $109k @ 6.3% average (student loans)
Tax Filing Status: Single for 2017, Married Filing Jointly for 2018
Tax Rate: 15% Federal, 3.07% State
State of Residence: PA
Age: 26
Income: $31.5k for 2017 (stub year), $173k for 2018

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 33.3% of stocks

Current retirement assets
$14k - Roth IRA - Vanguard LifeStrategy Growth (0.15% ER) - 80% stocks, 20% bonds.
$800 - HSA - currently not invested, will grow to $3,400 by end of year. I can invest amounts above $2,100. Will have access to Vanguard funds in HSA.

Size of the portfolio: $14,800, see above.

Taxable
None.

His 401k Company match?
None yet. This is my first 401(k). No match.

New annual Contributions
$18,000 his 401k (planned starting in 2018)
$5,500 his Roth IRA
$3,450 his HSA

Available funds

Funds available in his 401(k)
Russell Retirement Fund - Target Date (0.48%)
Russell 2020 Target Date Fund through Russell 2060 TD Fund (average of 0.53%)
Russell Investment Contract Fund (0.30%)
Russell Fixed Income Fund (0.41%)
Russell Inflation Protected Securities Fund (0.28%)
Russell 1000 Index Fund (0.13%)
Russell U.S. Large Cap Equity Fund (0.70%)
Harbor Capital Appreciation (0.70%)
Russell International Equity Index Fund (0.21%)
Russell All International Equity Fund (0.83%)
Russell U.S. Small Cap Equity Fund (0.85%)
Russell Global Real Estate Securities Fund (0.92%)

Welcome to Bogleheads.
Questions:
1. I will be in the 15% bracket for 2017, so I am planning to make a Roth 401(k) contribution of $2,000 per paycheck for the last three paychecks of 2017. Is this a good choice, or should I go with the traditional 401(k)? I am planning to switch to the traditional 401(k) for 2018, given my higher income.
Roth 401k for tax year 2017, and traditional 401k for tax year 2018

2. I want to move towards the three-fund portfolio, but I'm not sure how to most efficiently do this across all accounts. I underlined and italicized the three 401(k) choices that I found most reasonable. Both equity index funds are passive, but the fixed income fund is an actively managed fund at a higher 0.41% ER. How do I allocate funds across the HSA, Roth IRA, and 401(k) to meet my desired asset allocation of 53.33% US stocks, 26.67% international stocks, and 20% US bonds? This is one possible plan: bonds in Roth IRA, international stocks in the rest of Roth IRA and HSA, and then Russell 1000 Index Fund in 401(k).
HSA: Bonds
Roth IRA: International stock (VEA) and bonds (BND)
Traditional 401k: Russell 1000 Index and Inflation Protected Securities Fund
Roth 401k: Russell 1000 Index
Taxable: International stock (VXUS)


3. The 401(k) funds have gaps in them. For example, the Russell 1000 Index Fund only covers the top 1,000 stocks, but the Vanguard Total Stock Market Index Fund covers about 3,600 stocks. Should I buy the actively managed Russell U.S. Small Cap Equity Fund (0.85%) to fill the gap?

The gap is too small to matter.

Same question for the International Equity Fund. It covers only the develop non-US markets. Should I be worried about adding emerging market exposure?
The international options in the 401k program looked bad. These gaps are usually not significant.

5. With over $100k in debt, is it even smart to max out 401(k), HSA, and Roth IRA? Should I instead focus on paying down debt and then start investing?
Maybe put in half for investing and put in other half for debt reduction.
Thanks for all of the help!
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