Help with 401(k) options that went from not-amazing to worse after company acquisition

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middistancerunner
Posts: 287
Joined: Tue Aug 19, 2014 12:02 am

Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by middistancerunner » Tue Jan 22, 2019 5:27 pm

Hi forum,

You all generously helped me a few months ago with my brother's 401(k) options, in a plan that was not-amazing. The link, for full context on his financial situation, is here: viewtopic.php?f=1&t=257577

The TL;DR of your advice was that the State Street line of Target Retirement funds (ER=0.62%) was a good bet for him, at least up to the company match, if not more.

His company was recently acquired, however, and the options seem to now be significantly worse (despite the buy-out being by a much larger company?). The Target Date funds are now double the price, and most things have an ER over 1%. They also got rid of the company match :(, compensating for the loss with a one-time raise.

Relevant information: He is in the 22% Federal tax bracket, and 9% State (Oregon). He makes $90,000 per year and is an early-career software developer (age 29). I don't think it's all that implausible given where he is in his career, and the future evolution of tax brackets, that he could end up in a higher tax bracket in retirement. He currently has $50,000 across all retirement accounts and maxes his Roth every year.

He'd prefer a relatively simple and set-and-forget. From looking at his options, it seems the best options among the below would possibly be a simple 80%/20% mix of State Street S&P 500 Index Securities Lending Series Fund - Class IX/ Large Blend (ER=0.70%) and Pioneer Bond Fund - Class A/ Intermediate-Term Bond (ER=0.85%). Either that or only the S&P 500 fund.

Alternatively, maybe given his being early career, perhaps this 401(k) doesn't actually make sense to contribute to at all? Any thoughts on whether this plan meets that threshold?

He doesn't have a clear sense of how long he will stay with this company. He doesn't tend to move companies a lot.

Thank you very much in advance!

New 401(k) fund options:
Invesco Stable Asset Fund/ Stable Value 1.13%
Benchmark – USTREAS T-Bill Cnst Mat Rate 3 Yr

Pioneer Bond Fund - Class A/ Intermediate-Term Bond 0.85%
Benchmark – Barclays US Agg Bond TR USD

T. Rowe Price Retirement 2005 Fund - Class R/ Target-Date 1.10%
Benchmark – Morningstar Lifetime Moderate 2010

T. Rowe Price Retirement 2010 Fund - Class R/ Target-Date 1.09%
Benchmark – Morningstar Lifetime Moderate 2010

T. Rowe Price Retirement 2015 Fund - Class R/ Target-Date 1.12%
Benchmark – Morningstar Lifetime Moderate 2015

T. Rowe Price Retirement 2020 Fund - Class R/ Target-Date 1.16%
Benchmark – Morningstar Lifetime Moderate 2020

T. Rowe Price Retirement 2025 Fund - Class R/ Target-Date 1.19%
Benchmark – Morningstar Lifetime Moderate 2025

T. Rowe Price Retirement 2030 Fund - Class R/ Target-Date 1.22%
Benchmark – Morningstar Lifetime Moderate 2030

T. Rowe Price Retirement 2035 Fund - Class R/ Target-Date 1.24%
Benchmark – Morningstar Lifetime Moderate 2035

T. Rowe Price Retirement 2040 Fund - Class R/ Target-Date 1.26%
Benchmark – Morningstar Lifetime Moderate 2040

T. Rowe Price Retirement 2045 Fund - Class R/ Target-Date 1.26%
Benchmark – Morningstar Lifetime Moderate 2045

T. Rowe Price Retirement 2050 Fund - Class R/ Target-Date 1.26%
Benchmark – Morningstar Lifetime Moderate 2050

T. Rowe Price Retirement 2055 Fund - Class R/ Target-Date 1.26%
Benchmark – Morningstar Lifetime Moderate 2055

T. Rowe Price Retirement 2060 Fund - Class R/ Target-Date 1.26%
Benchmark –

T. Rowe Price Retirement Balanced Fund - Class R/ Risk Based 1.07%
Benchmark – Morningstar Moderately Cons Target Risk

JPMorgan Equity Income Fund - Class A/ Large Value 1.04%
Benchmark – Russell 1000 Value TR USD

Franklin Rising Dividends Fund - Class A/ Large Blend 0.91%
Benchmark – Russell 1000 TR USD

State Street S&P 500 Index Securities Lending Series Fund - Class IX/ Large Blend 0.70%
Benchmark – S&P 500 TR USD

Alger Capital Appreciation Institutional Fund - Class I/ Large Growth 1.12%
Benchmark – Russell 1000 Growth TR USD

Victory Sycamore Established Value Fund - Class A/ Mid-Cap Value 0.95%
Benchmark – Russell Mid Cap Value TR USD

State Street S&P MidCap Index Non Lending Series Fund - Class J/ Mid-Cap Blend 0.71%
Benchmark – Russell Mid Cap TR USD

Oppenheimer Discovery Mid Cap Growth Fund - Class A/ Mid-Cap Growth 1.32%
Benchmark – Russell Mid Cap Growth TR USD

Delaware Small Cap Value Fund - Class A/ Small Value 1.21%
Benchmark – Russell 2000 Value TR USD

State Street Russell Small Cap Index Sec Lending Series Fund Class VIII/ Small Blend 0.96%
Benchmark – Russell 2000 TR USD

Janus Triton Fund - Class S/ Small Growth 1.18%
Benchmark – Russell 2000 Growth TR USD

AllianzGI NFJ International Value Fund - Class A/ Foreign Large Value 1.26%
Benchmark – MSCI ACWI Ex USA Value NR USD

State Street International Index Securities Lending Series Fund Class VIII/ Foreign Large Blend 0.99%
Benchmark – MSCI AC World Ex USA NR USD

Oppenheimer International Growth Fund - Class A/ Foreign Large Growth 1.14%
Benchmark – MSCI ACWI Ex USA Growth NR USD - Foreign Large Growth

Oppenheimer Global Fund - Class A/ World Stock 1.15%
Benchmark – MSCI AC World NR USD

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dunkmachine
Posts: 41
Joined: Sat Jan 06, 2018 12:48 pm

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by dunkmachine » Tue Jan 22, 2019 5:54 pm

I think the State Street S&P 500 Index and Pioneer Bond Fund are the best options. Now since he maxes Roth each year, he can carry all his bond allocation there since he'll likely have much better choices.

You can read through this section from the Wiki, which may be helpful: https://www.bogleheads.org/wiki/401%28k ... re_choices

The advantage to investing in 401(k) is if your brother leaves the company, at least it can then be rolled over into a tIRA which will most definitely have better choices.

If he can get married while maintaining a MAGI <$103,000 he'll qualify for a deductible tIRA which would be the next best option https://www.irs.gov/retirement-plans/20 ... an-at-work.

samsdad
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Joined: Sat Jan 02, 2016 6:20 pm

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by samsdad » Tue Jan 22, 2019 6:13 pm

I’d hold my nose and max the 401k. Next year there could be matching or even lower ERs. And yeah, you could roll it over one day to a tIRA. Any idea if there’s a Roth 401k option?

At first blush, I’d go with 100% S&P 500 given his age. On the other hand, he might make a bet and devote some to the midcap fund too given the historically strong midcap performance and thereby “get some back” from the ERs.

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David Jay
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Location: Michigan

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by David Jay » Tue Jan 22, 2019 6:19 pm

samsdad wrote:
Tue Jan 22, 2019 6:13 pm
Next year there could be ... lower ERs.
There have been a lot of lawsuits against companies RE: 401K expenses. Companies are sensitive to this and may move to lower ERs over time to preclude these types of lawsuits.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by retiredjg » Tue Jan 22, 2019 6:28 pm

It appears the employers are passing on the cost of the plan to the employees.

The 500 index fund is the best of the lot. The stable value fund may be worthwhile - even with the high expense ratio. What is it paying this year? (What it pays is after the expense ratio so the expense ratio may not matter).

If not, maybe the Pioneer bond fund.

This plan is somewhat ugly, but not ugly enough to skip. He should use it. Even a bad plan is worthwhile unless he will be in that bad plan for 15 to 20 or even 30 years (depending on the cost). This is not the worst plan we have seen.

Since there is no match, he should fill a Roth IRA first and contribute the rest of his retirement savings to the bad plan.

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Epsilon Delta
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Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by Epsilon Delta » Tue Jan 22, 2019 6:35 pm

When I've been in this situation I've had the opportunity to roll the old 401(k) into an IRA rather than the new 401(k). It may even be required that they give you that option, so read the documents carefully.

If possible I'd get the old money into an IRA with Boglehead expense ratios. Then I'd probably hold my nose and contribute to the best of the bad options in the new 401(k) -- bearing in mind I can balance the asset allocation with the IRA so I'd only need one not awful fund for a while.

Topic Author
middistancerunner
Posts: 287
Joined: Tue Aug 19, 2014 12:02 am

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by middistancerunner » Tue Jan 22, 2019 7:40 pm

retiredjg wrote:
Tue Jan 22, 2019 6:28 pm
It appears the employers are passing on the cost of the plan to the employees.

The 500 index fund is the best of the lot. The stable value fund may be worthwhile - even with the high expense ratio. What is it paying this year? (What it pays is after the expense ratio so the expense ratio may not matter).

If not, maybe the Pioneer bond fund.

This plan is somewhat ugly, but not ugly enough to skip. He should use it. Even a bad plan is worthwhile unless he will be in that bad plan for 15 to 20 or even 30 years (depending on the cost). This is not the worst plan we have seen.

Since there is no match, he should fill a Roth IRA first and contribute the rest of his retirement savings to the bad plan.
Thank you! Returns on Stable Value fund don't seem great to me. Pioneer seems better?

Invesco Stable Asset Fund/ Stable Value
0.93% 0.76% N/A 0.81%
1.13% $11.30 1.13% $11.30
Benchmark – USTREAS T-Bill Cnst Mat Rate 3 Yr
0.51% 0.10% 2.28% 0.54%
N/A N/A N/A N/A

Pioneer Bond Fund - Class A/ Intermediate-Term Bond
4.18% 3.79% 5.16% 7.32%
0.85% $8.50 0.98% $9.80
Transfers into this fund are not permitted for 30 days after you transfer out of the fund.
Benchmark – Barclays US Agg Bond TR USD
2.65% 2.23% 4.34% 7.60%
N/A N/A N/A N/A

I assume these returns are listed as net of ER, correct?

Topic Author
middistancerunner
Posts: 287
Joined: Tue Aug 19, 2014 12:02 am

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by middistancerunner » Tue Jan 22, 2019 7:42 pm

Epsilon Delta wrote:
Tue Jan 22, 2019 6:35 pm
When I've been in this situation I've had the opportunity to roll the old 401(k) into an IRA rather than the new 401(k). It may even be required that they give you that option, so read the documents carefully.

If possible I'd get the old money into an IRA with Boglehead expense ratios. Then I'd probably hold my nose and contribute to the best of the bad options in the new 401(k) -- bearing in mind I can balance the asset allocation with the IRA so I'd only need one not awful fund for a while.
Thanks! Because he is a new employee, he doesn't have any money in the old plan. So unfortunately this isn't relevant.

Topic Author
middistancerunner
Posts: 287
Joined: Tue Aug 19, 2014 12:02 am

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by middistancerunner » Tue Jan 22, 2019 7:56 pm

dunkmachine wrote:
Tue Jan 22, 2019 5:54 pm
I think the State Street S&P 500 Index and Pioneer Bond Fund are the best options. Now since he maxes Roth each year, he can carry all his bond allocation there since he'll likely have much better choices.

You can read through this section from the Wiki, which may be helpful: https://www.bogleheads.org/wiki/401%28k ... re_choices

The advantage to investing in 401(k) is if your brother leaves the company, at least it can then be rolled over into a tIRA which will most definitely have better choices.

If he can get married while maintaining a MAGI <$103,000 he'll qualify for a deductible tIRA which would be the next best option https://www.irs.gov/retirement-plans/20 ... an-at-work.
Thank you! Never saw this before! Running this calculation, I'm getting it makes sense to use the 401K if (0.7-0.04)*YEARS<=1.5*(15+9), or YEARS <= 1.5*24/0.66 = 54.5 years.

Am I doing this right? If that's right, definitely makes sense to use it!

retiredjg
Posts: 38461
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with 401(k) options that went from not-amazing to worse after company acquisition

Post by retiredjg » Wed Jan 23, 2019 8:37 am

middistancerunner wrote:
Tue Jan 22, 2019 7:40 pm
Thank you! Returns on Stable Value fund don't seem great to me. Pioneer seems better?
It appears so.

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