Exiting UIT Purgatory for a Novice Boglehead

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DEBLM1419
Posts: 3
Joined: Fri Dec 29, 2017 5:07 pm

Exiting UIT Purgatory for a Novice Boglehead

Post by DEBLM1419 » Fri Dec 29, 2017 5:17 pm

The Basics
Emergency funds: > $10,000 [~3-4 months of living expenses]
Debt:
Student Loans
$16,327 – 6.8% interest rate
$3,552 – 1.78% interest rate

Tax Filing Status: Single; Will change to Married in October, uncertain if we will be file jointly for our next tax returns
Tax Rate: 28% Federal, 5.5% State
State of Residence: CT
Age: 33
Desired Asset allocation: 50% US stocks/ 20% International stocks/ 30% bonds

Current Portfolio Size: ~$23,500

Current retirement assets

Taxable
28% cash – Held in high interest savings account; earmarked for wedding expenses and will be used prior to October 2018.

Traditional IRA
26% Guggenheim High Dividend Strategy Portfolio-Series 11 (CTUHKX) (0.23% expense ratio | 3.95% sales fee)
22% Guggenheim Blue Chip Growth Portfolio Series 16 (CBCHPX) (0.22% expense ratio | 2.75% sales fee)
15% Guggenheim Blue Chip Growth Portfolio Series 13 (CBCHMX) (0.23% expense ratio | 3.95% sales fee)
7% Guggenheim Blue Chip Growth Portfolio Series 11 (CBCHKX) (0.24% expense ratio | 3.95% sales fee)
2% Fidelity Government Cash Reserves (FDRXX) (0.37% expense ratio)

Total Current Asset Allocation
30% cash
70% equities (Exclusively in unit investment trusts, tilted towards US growth stocks)

Contributions

New annual Contributions
$14,000 annually to his 401k | Zero employer match (Goal is to increase contribution to annual maximum as budget can tolerate it)
$0 annually to his IRA

Available funds

Fund in his 401(k)
PIMCO Total Return Fund (PTTRX) (0.46% expense ratio)
Fidelity Government Income Fund (FGOVX) (0.45% expense ratio)
Fidelity Strategic Income Fund (FSICX) (0.70% expense ratio)
Fidelity Capital & Income Fund (FAGIX) (0.73% expense ratio)
Allianz NFJ Dividend Value Fund (NFJEX) (0.59% expense ratio)
Fidelity Large Cap Value Fund (FLVEX) (0.39% expense ratio)
Fidelity Disciplined Equity Fund (FDEQX) (0.68% expense ratio)
Fidelity Dividend Growth Fund (FDGFX) (0.52% expense ratio)
Fidelity Fund (FFIDX) (0.52% expense ratio)
Fidelity 500 Index Fund (FUSEX) (0.09% expense ratio)
Janus Adviser Forty Fund S Class (JARTX) (1.21% expense ratio)
Fidelity Growth Discovery Fund (FDSCX) (0.66% expense ratio)
Allianz NFJ Small-Cap Value Fund (PSVIX) (0.84% expense ratio)
Fidelity Leveraged Company Stock Fund (FLVCX) (0.80% expense ratio)
Spartan Extended Market Index Fund (FSEMX) (0.10% expense ratio)
Fidelity Small Cap Value Fund (FCPVX) (0.99% expense ratio)
Morgan Stanley Institutional Fund Trust Mid Cap Growth Portfolio (MPEGX) (0.74% expense ratio)
Fidelity Small Cap Growth Fund (FCPGX) (1.09% expense ratio)
DWS Emerging Markets Equity Fund-Class S (SEMGX) (0.98% expense ratio)
Fidelity International Discovery Fund (FIGRX) (1% expense ratio)
Fidelity International Index Fund (FSIIX) (0.16% expense ratio)
Fidelity Emerging Markets Fund (FEMKX) (1.01% expense ratio)

Background:
For the past few years, I’ve trusted an acquaintance with my retirement planning. Though he helped me establish an IRA at a time when I did not know (or bother to learn) anything about investment and did not have an employer-provided 401(k) plan, I’ve since come to see the value in learning about investing and developing a cost-effective, thoughtful, and diversified portfolio. With this in in mind, I was shocked to learn about the high loads and limited diversification in the Unit Investment Trusts my acquaintance has purchased within my traditional IRA. I have informed my acquaintance that I will no longer be making contributions into my traditional IRA, and will begin investing in the funds offered through my employer-sponsored Fidelity 401(k) plan. However, I am reluctant to sell my UITs. Rather, I am inclined to let each of them mature (they each have two-year durations) and transfer the resulting funds into my 401(k) for re-investment in vehicles that fit within my plan.

I am ready to develop a coherent investment and asset allocation plan. Because of the small size of my current portfolio, I’d like to utilize a simple three-fund approach with an allocation of 50% US stocks/20% international stocks/30% bonds. My goal is to diversify this allocation in the future as my portfolio grows and I develop a better understanding of what will suit my needs best. With that in mind, I have several questions.

Questions:
1. Is it prudent to “wait out” the maturity of each of the UITs I presently own? I am wary of the significant discount in the sale price of the UITs if I were to sell them prior to their maturity.

2. Assuming that I allow the UITs to mature, my plan is to treat those investments as the “US stock” component of my portfolio. As the investments mature, I’d like to put their proceeds into my 401(k) and invest them in whichever funds are necessary to maintain my desired 50% US stock/20% international stock/30% bond asset allocation.

3. Again, assuming that I hold my existing UITs until maturity, my current asset allocation is presently 70% US Stocks/30% cash. Thus, as I begin to invest in my 401(k) plan, I intend to purchase shares of the Fidelity International Index Fund until I reach my desired allocation for international stocks. However, I am uncertain as to which, if any, bond fund to purchase. I do not like my 401(k) plan’s bond offerings. I see two possible alternatives: 1) purchase either the PIMCO Total Return Fund or the Fidelity Government Income Fund because they are the cheapest options available to me, or 2) open a Roth IRA with Vanguard or Fidelity and invest in a lower cost bond fund. What would be most prudent for a novice like me?

Thank you for any and all assistance.

~A grateful Boglehead

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Duckie
Posts: 7005
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Exiting UIT Purgatory for a Novice Boglehead

Post by Duckie » Fri Dec 29, 2017 8:33 pm

DEBLM1419, welcome to the forum.
DEBLM1419 wrote:Student Loans
$16,327 – 6.8% interest rate
Work on this.
Age: 33
Desired Asset allocation: 50% US stocks/ 20% International stocks/ 30% bonds
This AA is reasonable.
Total Current Asset Allocation
30% cash
70% equities (Exclusively in unit investment trusts, tilted towards US growth stocks)
The cash is for the wedding, etc. It is not part of the retirement portfolio.
New annual Contributions
$14,000 annually to his 401k | Zero employer match (Goal is to increase contribution to annual maximum as budget can tolerate it)
$0 annually to his IRA
I'd contribute to a new IRA at either Vanguard or Fidelity and adjust the amount going to the 401k. If you max the IRA at $5.5K that means planning for $8.5K to go to the 401k. You can put bonds in the IRA.
Available funds
The best options are:
  • Fidelity 500 Index (FUSEX) (0.09%) -- Large caps, 80% of US stocks
  • Spartan Extended Market Index (FSEMX) (0.10%) -- Mid/small caps, 20% of US stocks
  • Fidelity International Index (FSIIX) (0.16%) -- Developed markets, ~75% of international stocks
  • PIMCO Total Return (PTTRX) (0.46%) -- US bonds
I am reluctant to sell my UITs. Rather, I am inclined to let each of them mature (they each have two-year durations) and transfer the resulting funds into my 401(k) for re-investment in vehicles that fit within my plan.
When are the two-year durations up? Do they all expire at roughly the same time?
Is it prudent to “wait out” the maturity of each of the UITs I presently own? I am wary of the significant discount in the sale price of the UITs if I were to sell them prior to their maturity.
I have no knowledge of UITs, but if maturity isn't too far off then waiting to sell may be fiscally prudent. How much in dollars would you lose if you sold them now?
Assuming that I allow the UITs to mature, my plan is to treat those investments as the “US stock” component of my portfolio. As the investments mature, I’d like to put their proceeds into my 401(k) and invest them in whichever funds are necessary to maintain my desired 50% US stock/20% international stock/30% bond asset allocation.
Do not take the proceeds of out the TIRA. Find out if Vanguard or Fidelity can can handle these UITs. If they can you can move the TIRA from your current custodian to either Vanguard or Fidelity now. If they can't handle these UITs then you'll have to wait to move the TIRA until they mature.
Again, assuming that I hold my existing UITs until maturity, my current asset allocation is presently 70% US Stocks/30% cash.
It isn't 70/30. The cash is for something other than retirement.
I do not like my 401(k) plan’s bond offerings. I see two possible alternatives: 1) purchase either the PIMCO Total Return Fund or the Fidelity Government Income Fund because they are the cheapest options available to me, or 2) open a Roth IRA with Vanguard or Fidelity and invest in a lower cost bond fund.
If you put bonds in the 401k use PIMCO Total Return. If you open an IRA at Vanguard use Total Bond Market, if at Fidelity use U.S. Bond Index. Since you are in the 28% bracket are you sure can contribute to a Roth IRA because of income limits?

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celia
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Location: SoCal

Re: Exiting UIT Purgatory for a Novice Boglehead

Post by celia » Fri Dec 29, 2017 9:00 pm

DEBLM1419 wrote:
Fri Dec 29, 2017 5:17 pm
Traditional IRA
26% Guggenheim High Dividend Strategy Portfolio-Series 11 (CTUHKX) (0.23% expense ratio | 3.95% sales fee)
22% Guggenheim Blue Chip Growth Portfolio Series 16 (CBCHPX) (0.22% expense ratio | 2.75% sales fee)
15% Guggenheim Blue Chip Growth Portfolio Series 13 (CBCHMX) (0.23% expense ratio | 3.95% sales fee)
7% Guggenheim Blue Chip Growth Portfolio Series 11 (CBCHKX) (0.24% expense ratio | 3.95% sales fee)
2% Fidelity Government Cash Reserves (FDRXX) (0.37% expense ratio)
The expense ratios are fine. It is the "sales fee" that are the killer here. Is this fee paid when you bought the shares/units, when you sell them, or only when you sell them prior to the 2-year period?

When the 2-year period is over, I would cash them out and transfer the money to a tIRA at Vanguard or Fidelity. You will both want to share your assets and debts with each other (if you haven't already) so you can build a unified plan, unless you are agreeing to keep things separate, such as if one of you already has kids that they need to consider. Don't open joint accounts until after you are married. But do start thinking about a budget for living expenses. It's not "romantic" but it will help show if you both have different outlooks on finances. Hopefully you will start with similar mindsets.

NancyABQ
Posts: 285
Joined: Thu Aug 18, 2016 3:37 pm

Re: Exiting UIT Purgatory for a Novice Boglehead

Post by NancyABQ » Fri Dec 29, 2017 9:06 pm

I am more familiar with First Trust UITs, but for those the horrible fees are paid up front (in the first couple months). So if that's the case for yours, then I would just let them ride until they mature. The fees are water under the bridge and the performance on them may be fine. In theory they are "liquid" (you can sell them on the market before they mature), but that might incur fees or not really allow you to sell at the market price (listed NAV)?

I am speaking as somebody who inherited a bunch of UITs in an inherited IRA and a trust. I am just letting them all run their course, and some of them have done pretty well, as far as returns go. I certainly won't be buying any more of them. Besides all the fees, in a taxable account I don't like them because you are forced to realize any gains/losses when they mature. I would prefer to choose when to sell my investments, to manage gain/loss accordingly.

In future, you are on the right course -- don't buy these fee-laden products. Low-fee index funds are the way to go!

Edit: Even if you are going to hold the UITs to maturity, you should probably get your funds out of the clutches of that "advisor". You should be able to transfer-in-kind to the brokerage of your choice. I did this successfully transferring my inherited IRA to Schwab and the UITs came across fine.

Topic Author
DEBLM1419
Posts: 3
Joined: Fri Dec 29, 2017 5:07 pm

Re: Exiting UIT Purgatory for a Novice Boglehead

Post by DEBLM1419 » Sat Jan 06, 2018 5:58 pm

Thank you for your helpful responses. Below is some additional information based on follow up questions I received:

1) After taking out my current wedding reserves from my asset allocation, my true asset allocation at this time is:

Total Current Asset Allocation
~2.75% cash
~97.25% equities (Exclusively in unit investment trusts, tilted towards US growth stocks)

2) The Maturity Dates of my current UITs:
- Blue Chip Series 11: 8/17/2018
- Blue Chip Series 13: 2/15/2019
- Blue Chip Series 16: 11/18/2019 (Would need to be sold at lower than current bid price at this time)
- High Dividend Strategy-Series 11: 2/15/2019 (Would need to be sold at lower than current bid price at this time)
- Estimated Loss of Value if all UITs Sold Today (Difference Between Current Valuation and Proceeds of Sales) = $113, I do not believe there will be additional sales expenses, but am not certain if there will be other hidden fees.

3) Under the new tax plan, I will now be in the 24% tax bracket. I will be eligible to open a Roth IRA and intend to do so.

Based on all of this information, my revised plan for 2018 will be as follows:

New annual Contributions
1) $8,5000 annually to his 401k (Goal is to increase contribution to annual maximum as budget can tolerate it)
2) $5,500 annually to his Roth IRA
3) Attempt to transfer existing IRA to Vanguard of Fidelity. Sell existing UITs and transfer to a US Total Market Index Fund.

Desired Allocation at End of 2018 (Assuming 14K Contribution)
Total Fund Amount = ~$31,000
~$15,550 – 50% US Equity
~$9,300 – 30% Bonds/Cash
~$6,150 – 20% International Stocks

Steps to Implement Desired Plan:
1) Make monthly contribution to high yield savings account until I can amass sufficient cash to invest in funds in a Roth IRA. Select either a) Fidelity US Bond Index Fund (FBIDX | Expense Ratio: 0.14% | Minimum Investment: $2,500) or b) Vanguard Total Bond Market Index Fund-Investor Share (VBMFX | Expense Ratio: 0.15% | Minimum Investment: $3,000). After Roth IRA is opened, continue to make monthly additions to the chosen amount up to the $5,500 maximum. [Year End 2018 - $5,500 in Bonds]
2) Make monthly contribution of $708 (equal to ~$8,500 desired annual contribution) to employer sponsored 401(k). Invest these funds into Fidelity International Index Fund (FSIIX) (0.16% expense ratio). [Year End 2018 - $8,500 in International Stocks]
3) Attempt to Transfer existing tIRA to Vanguard or Fidelity. Sell existing funds and transfer to US Total Stock Market Index Fund.
3) Based on this plan, Estimated Year End Asset Allocation will be:
a. 53% US Stock | 27% International Stock | 18% Bonds | ~2% Cash

Additional Questions:
• Based on my desired asset allocation, I will be overexposed to stocks for most of 2018. Is this prudent?
• Are there any advantages to using Vanguard vs. Fidelity? Because my employer sponsored plan is currently offered through Fidelity, I am inclined to use them for the ease of having most of my investments accessible through one platform. However, I am willing to use Vanguard if there are any decided advantages.

Again, thank you for your assistance.

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