Help choosing funds for girlfriends 401k

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Topic Author
Cruz
Posts: 108
Joined: Sun Mar 30, 2014 7:16 pm

Help choosing funds for girlfriends 401k

Post by Cruz » Wed Jan 09, 2019 5:58 pm

My girlfriend has a 401k available to her for the first time and has chosen to contribute 9% of her salary, her employer has a 4% match. The 401k is managed through John Hancock. Until last year she did not invest, but now is contributing to a traditional 401k and a Roth IRA. Due to student loans and low savings she is not able to contribute the maximum but is trying to increase the amount.

Age 29:
Salary: $65k
Savings: working to build emergency fund
Debt: School loans, paying maximum payment
Roth IRA @ Vanguard: Vanguard Target Retirement 2055 Fund (90% stocks/10% bonds)

All of the 401k fund options have high expense ratios, she is currently invested in the T Rowe Price 2055 fund (90% stocks/10% bonds) (ER 1.67). Among the funds available to her, I picked the following Vanguard funds as possible alternatives to the T Rowe Price 2055 fund as the ERs are lower:

Vanguard Growth Index Fund (ER 1.15)
Vanguard Value Index Fund (ER 1.15)

There are a couple other Vanguard funds (mid-cap, energy) but I don't think they are as suitable to her as the two above, I can get the specific funds if needed.

Because she has relatively low savings and is just starting to invest for retirement she feels okay with an aggressive AA, would it make sense for her to change her 401k funds to either of the Vanguard funds? Any comments or questions welcome :)

Thanks

evilityb
Posts: 178
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Location: The District of Columbia

Re: Help choosing funds for girlfriends 401k

Post by evilityb » Wed Jan 09, 2019 6:27 pm

1) Send a link of this thread to your girlfriend. It's awesome that you're helping her get started by introducing her to the forum. Being educated and empowered over her finances going forward will, of course, serve her well.

2) Please list (or better, girlfriend, sign up for a BH account and list) all of the funds available in the 401(k) with their expense ratios.

3) Contributing 9% to your 401(k) could be fine, but it might make more sense to only contribute 4%, up to the match and put a little more towards either student loans or the emergency fund first.

4) What bond funds are available in the 401(k)? Consider holding all of the bonds in the tax-deferred account and only equities in the Roth IRA.

When I was 29, I was in the same financial position with no EF, little retirement savings, access to a 401(k) for the first time, and making just under $65k. I found the Boglheads about 2 years later, and now at age 35, I'm approaching a net worth of $350k.

Stay the course, and good luck.
Make sure the fortune that you seek is the fortune that you need - Ben Harper

Topic Author
Cruz
Posts: 108
Joined: Sun Mar 30, 2014 7:16 pm

Re: Help choosing funds for girlfriends 401k

Post by Cruz » Wed Jan 09, 2019 10:46 pm

Thanks for the reply! She's interested in it, but not trying to flood her with info.

Here are the funds available in her 401k:

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whodidntante
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Re: Help choosing funds for girlfriends 401k

Post by whodidntante » Wed Jan 09, 2019 11:17 pm

Personally I would put it 100% in DFA emerging markets value for a few years and see what happens. But I am wired differently and that is not what I would advise anyone else to do. I think I'm supposed to tell you to buy the S&P 500 fund. Some international stocks if so inclined.

This will matter more:
Contribute to the 401k, up to the match.
Fully fund an HSA, if eligible. Invest that.
Fully fund an IRA.
Probably buy equity index ETFs in taxable if there is anything left, unless you expect to be able to roll the 401k to an IRA anytime soon.

Your lady's 401k is horrifying.

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Raymond
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Location: Texas

Re: Help choosing funds for girlfriends 401k

Post by Raymond » Wed Jan 09, 2019 11:38 pm

whodidntante wrote:
Wed Jan 09, 2019 11:17 pm
Personally I would put it 100% in DFA emerging markets value for a few years and see what happens. But I am wired differently and that is not what I would advise anyone else to do. I think I'm supposed to tell you to buy the S&P 500 fund. Some international stocks if so inclined.

This will matter more:
Contribute to the 401k, up to the match.
Fully fund an HSA, if eligible. Invest that.
Fully fund an IRA.
Probably buy equity index ETFs in taxable if there is anything left, unless you expect to be able to roll the 401k to an IRA anytime soon.

Your lady's 401k is horrifying.
I don't know about "horrifying" (for me that would be expense ratios of 2% or more), but it is pretty icky :?

No surprise, it's John Hancock :greedy

In her situation, I would do what whodidntante suggested:

401(k) to get the full 4% employer match (and no more), then the rest of her contributions to HSA (if available), then Roth IRA.
"Ritter, Tod und Teufel"

billfromct
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Re: Help choosing funds for girlfriends 401k

Post by billfromct » Wed Jan 09, 2019 11:57 pm

My son's 401k is through John Hancock & his total stock market index fund has a .68% ER.

I thought the .68% ER was bad, but I guess the .68% ER isn't so bad compared to other John Hancock 401k plans.

bill

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Spinola
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Re: Help choosing funds for girlfriends 401k

Post by Spinola » Thu Jan 10, 2019 1:07 am

The John Hancock ERs are highway robbery! If I were young again :mrgreen: I'd go 100% SP500 or a mix of the SP500 and International, maybe 80/20. Start adding bonds at age 43 to 45 (15-20% based on your risk adversity) and add 1 % a year until retirement

MotoTrojan
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Re: Help choosing funds for girlfriends 401k

Post by MotoTrojan » Thu Jan 10, 2019 1:19 am

billfromct wrote:
Wed Jan 09, 2019 11:57 pm
My son's 401k is through John Hancock & his total stock market index fund has a .68% ER.

I thought the .68% ER was bad, but I guess the .68% ER isn't so bad compared to other John Hancock 401k plans.

bill
My SOs recently seemed to have a ~0.05% ER S&P500 but the time before that it looked more like OPs; I'd still go with the 500 Index Fund here at 1.14% but only up to the match, then max a Roth and maybe HSA as suggested.

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Watty
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Re: Help choosing funds for girlfriends 401k

Post by Watty » Thu Jan 10, 2019 9:26 am

Cruz wrote:
Wed Jan 09, 2019 5:58 pm
...has chosen to contribute 9% of her salary, her employer has a 4% match.
...
Salary: $65k
Savings: working to build emergency fund
Debt: School loans, paying maximum payment....
It might be good for her to just contribute enough to get the employer match until she has a reasonable emergency fund. My concern is that is she has some big expense she could end up with expensive credit card debt which is a hard hole to dig yourself out of.

In addition to her student loans she may also have other goals like saving up a downpayment for a house or saving up to pay cash for her next car.

Contributing to the 401k is great but saving up for her other goals also adds the same amount to her after tax net worth which is the important thing. One thing I do is to update a simple spreadsheet with my net worth each year on January 1st. She might want to start doing that to make it easier to see her overall progress over the years.
Cruz wrote:
Wed Jan 09, 2019 5:58 pm
All of the 401k fund options have high expense ratios, she is currently invested in the T Rowe Price 2055 fund (90% stocks/10% bonds) (ER 1.67). Among the funds available to her, I picked the following Vanguard funds as possible alternatives to the T Rowe Price 2055 fund as the ERs are lower:

Vanguard Growth Index Fund (ER 1.15)
Vanguard Value Index Fund (ER 1.15)
If she does contribute the 9% in addition to the 4% match then she will contribute $8,450 this year which is great. With an ER of 1.15% that will cost her $8450 * 1.15% /2= $48.59 in expenses. The reason it is divided by 2 is that she will make the payroll contributions over the course of the year so her average balance is only half her total contributions.

The problem with just using those funds is that it does not include international stocks or a bond fund so it may be more volatile.

If she stayed with the target date fund with an ER of 1.67% that will cost her $8450 * 1.67% /2= $70.56 in expenses which is $21.97 more.

I think that this year sticking with the Target date fund would be a reasonable choice for the extra $22 since that would help her get more comfortable with investing and it might be a bit less volatile since it is more diversified. If she has to go in and tweak the 401k to rebalance several times over the year she will be watching her account balances closer which could make investing seem more intimidating for a beginner.

Next year when her account balance is higher the expenses will also be higher so it would be good to switch over to a three or four of the lower cost index funds then.

One thing I did when I was a bit older than her was that I committed to myself to save half of any future pay increases. That allowed me to painlessly increase my savings since every time I got a raise I still got more take home money and I never saw the additional money that I was putting into my 401k.

GrowthSeeker
Posts: 295
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Re: Help choosing funds for girlfriends 401k

Post by GrowthSeeker » Thu Jan 10, 2019 9:41 am

At her age, why not simply put it all into the 500 Index Fund?

Does anyone know if 401k plans charge an extra expense for each fund? You know, like the way some money managers charge a percent of the assets, plus a fee for each trade that is made. Does someone whose account has 10 funds pay more than someone who has 5 funds (assuming average expense ratio is the same)?
Just because you're paranoid doesn't mean they're NOT out to get you.

Topic Author
Cruz
Posts: 108
Joined: Sun Mar 30, 2014 7:16 pm

Re: Help choosing funds for girlfriends 401k

Post by Cruz » Thu Jan 10, 2019 10:52 am

Watty wrote:
Thu Jan 10, 2019 9:26 am

It might be good for her to just contribute enough to get the employer match until she has a reasonable emergency fund. My concern is that is she has some big expense she could end up with expensive credit card debt which is a hard hole to dig yourself out of.

In addition to her student loans she may also have other goals like saving up a downpayment for a house or saving up to pay cash for her next car.

Contributing to the 401k is great but saving up for her other goals also adds the same amount to her after tax net worth which is the important thing. One thing I do is to update a simple spreadsheet with my net worth each year on January 1st. She might want to start doing that to make it easier to see her overall progress over the years.
She is becoming more aware of her savings, and I am trying to educate her about it as best as I can. She has a savings account with Wells Fargo which has a dismal interest rate so that is the next thing I hope to help change. The automatic contributions to a Roth IRA or 401k are good for her because it makes her save automatically.

I talked with her a bit about the ERs, and we think it makes sense to change her contribution to the 4% employer match in the 401k as well as change her contributions to the 500 Index Fund available to her, and make up the 5% by increasing her contribution to the 2055 Target Retirement Fund in her Roth IRA.

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