401k Advice

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Topic Author
Eagle784
Posts: 73
Joined: Sat Mar 01, 2008 4:12 pm

401k Advice

Post by Eagle784 » Sun Oct 26, 2008 8:32 pm

A friend wants help with her first 401k. This will be her entire portfolio for now, though she may open a Roth later on. Unfortunately, she doesn't seem to have any index funds, and though she has a lot of choices, most are quite expensive. Below are her 30 cheapest options. I recommended the Fidelity Freedom 2050 Fund for now, but now I'm wondering whether it's perhaps wise to instead go with Fidelity Freedom Income, and have her open a Roth with more equity exposure. Thanks for your help.

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Investment Name	Expense Ratio
Fidelity Freedom Income Fund	0.49%
Fidelity Freedom 2000 Fund	0.51%
Fidelity Dividend Growth Fund	0.64%
Fidelity Freedom 2005 Fund	0.64%
Fidelity Freedom 2010 Fund	0.65%
Fidelity Freedom 2015 Fund	0.67%
Morgan Stanley Inst. Fund Trust Core Plus Fixed Income Portfolio Class P Shares	0.70%
PIMCO Low Duration Fund Administrative Class	0.71%
Fidelity Freedom 2020 Fund	0.72%
Fidelity Freedom 2025 Fund	0.73%
PIMCO Long-Term U.S. Government Fund Administrative Class	0.73%
AIM Constellation Fund Class I	0.74%
Western Asset Core Bond FI CL	0.74%
Fidelity Freedom 2030 Fund	0.76%
Fidelity Freedom 2035 Fund	0.77%
Van Kampen Growth & Income CL A	0.77%
PIMCO Total Return Fund Administrative Class	0.77%
Fidelity Freedom 2040 Fund	0.78%
Columbia Conservative High Yield Fund Class Z	0.78%
Fidelity Freedom 2045 Fund	0.78%
Fidelity Freedom 2050 Fund	0.80%
PIMCO High Yield Fund Administrative Class	0.81%
Oakmark Equity & Income CL I	0.83%
American Cent Lg Co Val Inv CL	0.83%
Morgan Stanley Institutional Fund Trust: U.S. Small Cap Value Portfolio Class I Shares	0.84%
Morgan Stanley Institutional Fund, Inc. Capital Growth Fund Class P Shares	0.87%
Morgan Stanley Institutional Fund Trust Mid Cap Growth Portfolio Class P Shares	0.88%
Morgan Stanley Institutional Fund Trust Value Portfolio Class P Shares	0.88%
Janus Fund	0.88%
Morgan Stanley Institutional Fund Trust Balanced Portfolio Class P Shares	0.91%

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PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
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Post by PiperWarrior » Sun Oct 26, 2008 8:57 pm

Does she get any company match?

How much is she saving? Is that more than the Roth IRA contribution limit?

If she has a long time horizion, Freedom 2050 may be OK, but make sure she is fully aware of the risk of having only 10% in bonds.

If she hasn't done so, she might want to read Investment Planning and one or two books recommended there.

Topic Author
Eagle784
Posts: 73
Joined: Sat Mar 01, 2008 4:12 pm

Post by Eagle784 » Sun Oct 26, 2008 9:20 pm

Yes, she her company contributes 1% if she contributes 4%, and she is contributing 4%. She'll contribute about $2500 a year as a result.

It's her first job, so she does have a long time horizon. I'll try to get her to read that.

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PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior » Sun Oct 26, 2008 11:26 pm

Eagle784 wrote:Yes, she her company contributes 1% if she contributes 4%, and she is contributing 4%. She'll contribute about $2500 a year as a result.
A 25% instant return isn't bad.

The reason why I pointed out the risk is that I've seen a young couple in their 20's put an aggressive Target Retirement fund in their Roth IRAs in 2007 only to find themselves cashing out just a few month later. If your friend doesn't know that stocks can go down by 50% or more in a bear market, then she may be asking for trouble. (And you may be in trouble for giving dangerous advice.) Larry Swedroe recommends people to look at one's unique willingness, risk, need to take risk. If your friend is young and healthy, she probably has the ability to risk. After all, she's got a lot of human capital yet to be converted to cash. The need to take risk may be somewhat flexible. You could say that she needs to take risk because she is far away from her financial goal. But then if she has a long horizon, there is nothing wrong with maintaining a somewhat conservative asset allocation and going steady for 30 years as long as that meets her goal. I don't know her willingness to take risk. People often don't know their true risk tolerance until they lose their own money. IMHO, it's important to get used to volatility early on while the portfolio is pretty small.

She might want to revisit her saving rate though. The contribution of $2,500/year gives you about $150K (in today's dollars) after 30 years of compounding, assuming 4% real return. If you apply the 4% safe withdrawal rates, then $150K gives you $6K/year, which may barely cover grocery. I certainly hope her income will beat the inflation over time, but I just want to let you know that saving more early on makes things easier later.

Good luck!

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