401(k) bond fund question: Active or Index?

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401(k) bond fund question: Active or Index?

Post by TierArtz » Sat Jun 30, 2018 2:54 pm

My employer uses Fidelity to manage my 401(k), but recently changed the available options and switched participants’ investments to the nearest match. My 401(k) had been 100% US Bond Index (FXSTX) and that was automatically exchanged to Northern Trust Aggregate Bond Index Fund (a CIT). Both options are designed to track the Bloomberg Barclays US Aggregate Bond Index, so the performance forward should be almost exactly the same. I will have to use a proxy (likely FXSTX) for the NT Bond Index in portfolio analysis tools because it does not have a ticker. The only other bond fund option in my 401(k) is Western Asset Core Plus Bond Fund Class IS (WAPSX); it is an active fund that uses some lower quality and foreign bonds to, hopefully, increase the return. Except for 2009, it has done very well in the last 10 years, beating the Bloomberg index by about 2.5% annually on average. The costs for these two options are 0.04% for the NT US Bond Index and 0.43% for WAPSX.

I’m tempted to switch to WAPSX for the chance for a better return. Others have asked about WAPSX and it seems fairly well regarded. Which should I choose and why?

For background I’m mid-fifties, have a military pension, Tricare, and some farm income which would provide about half of expenses if I retired. After FRA, passive income is projected to cover the vast majority of expenses. A big unknown is college expenses for three kids (7th, 6th, and 3rd grade); that and DW's sanity are why I'll work for at least 5 more years :wink:. Vanguard aggressive age-structured 529s are in place and each gets $250 per month and approximately 170K is presently available.

Thanks to recently kicking all bonds out of Roth IRAs and taxable, my AA is about 72/28 (stocks/bonds), which is about 4% under my present goal of age-25 in bonds. I’m really close to the 40% international goal for stocks.

I consider all other investments “retirement” funds (about 2.4M; 2.3M if I paid off the house) and the simplified/joint with DW distribution is:
VG Total Stock (VTSAX): 21.8%
VG Total International (VTIAX): 19.2%
No spare cash for additions to VG

Megacorp ESPP: 2.5%
Add about 20K/year; sell and reinvest in VG when over 5%

Fidelity 401(k); 37% Roth
Northern Trust US Bond Index: 21.2%
Adding about 35K/year, pretax, including match

G Fund: 6.8%

Vanguard Roth IRAs
VG Total Stock (VTSAX): 19.7%
VG Total International (VTIAX): 8.2%
Adding 13K/year via the backdoor

NQ Deferred Compensation (new account)
Fidelity 500 Index (FXSIX): 0.3%
Fidelity International Index FSPNX): 0.2%
Adding about 25K/year in a 60/40 split

Although the 401(k) bond choice represents the large majority of my bond allocation, I do not think my retirement security hinges on the bond fund selection; I'm just looking for some wise advice. Juicing up the performance could help me track my age-25 goal better. I'm adverse to putting bonds in the NQ-DCP as it is riskier than most tax advantaged accounts. If needed, or I ever have spare cash, I'm considering adding a national municipal bond index to the VG taxable account to get closer to age-25. I don't think it is worth selling appreciated stock indexes to do so though, but I've not crunched the numbers.


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Re: 401(k) bond fund question: Active or Index?

Post by dbr » Sun Jul 01, 2018 9:50 am

I don't know enough about the details of those funds to go down in the weeds between them, but what I can say is that when thinking about the expected return of your portfolio the handle to turn is the stock/bond allocation rather than to split hairs over the return of various bond funds. I would suggest selecting bond funds for cost before anything else (well, also duration, maybe) and I don't think active management of funds is a great idea, though people may differ in specific instances.

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Re: 401(k) bond fund question: Active or Index?

Post by sport » Sun Jul 01, 2018 10:06 am

IMO, your 72/28 allocation is already somewhat aggressive for your age. Accordingly, I would not want to add more risk in the selection of a bond fund. So, I would stay with the US bond fund. The purpose of the bonds in your portfolio is to have a measure of stability (otherwise you would be 100% stock). A riskier bond fund does not do this job as well.

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Re: 401(k) bond fund question: Active or Index?

Post by averagedude » Sun Jul 01, 2018 10:33 am

These are the 5 main questions that i believe people should ask themselves when it comes to bond investing.
1. What is the purpose of my fixed income investments?
2. What is the duration of my fixed income investments?
3. What is the credit quality of my fixed income investments?
4.What are the fees of my fixed income investments.
5. What is the likely real return after taxes of my fixed income investments?

Of course number 1 and number 5 are hard to answer, but answer number 1 before answering number 5.

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Re: 401(k) bond fund question: Active or Index?

Post by TierArtz » Sun Jul 01, 2018 10:37 am

Thanks dbr, sport and average dude! Having to deal with a forced change in bond fund made me consider the alternative. Active management has never worked for me before for more than about 5 years; the stars always become laggards. I'm probably going to avoid the temptation to see if "times have changed". I know they have not. The higher fee for the active management puts me off a bit and cuts into the the possible higher return every year.

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