Life Advice... Employer 401K

[_Rocco_]

Hello all,

Good evening. I was hoping to gain a bit of knowledge from the wonderful world of Bogleheads.

I have recently been employed by a company that offers a 401K Tax Deferred Savings Plan through Prudential but does not provide a company match. If I wanted to "set-it-and-forget-it", I assume I should go with the default contribution rate of 3%, Pre-Tax, in the Bright Horizon 2050 Fund.

The Plan offers multiple Elective Deferrals. These include Employee Pre-Tax, Roth 401(K), Option Week, Roth Option Week, and After-Tax (Non-Roth), in which I can contribute up to a certain amount to each per pay period.

Would contributing only Pre-Tax be the best option? While leaving the rest at 0%?


Once contribution amounts are selected, I am to choose an allocation to the fund/s I would like to invest in. While a Target Date Fund (.07) is an option, others include:
(.xx) = Expense Ratio

Stable Value Fund (.04)
Government Short-Term Investment Fund (.05)
Bond Market Index Fund (.02)
Balanced Fund (.04)
S&P 500 Equity Index Fund (.02)
S&P 400 Midcap Index Fund (.01)
Russel 2000 Index Fund (.02)
International Index Fund (.03)
US Reit Index Fund (.05)


I do not have any investments at the moment. I have a Roth IRA with Vanguard but have not made any contributions.

Does anyone suggest a better portfolio? 3-Fund? I am curious to hear from you.

Thanks,
Rocco

[Flyer24]

Since there is no match, you should max out your Roth IRA first.

[02nz]

Since there is no match, you should max out your Roth IRA first.

Not necessarily. OP, you need to tell us your income, or at least what's your top federal tax bracket, for us to make a recommendation on Roth vs traditional. If it's 22% or higher, you should defer taxes (using the pre-tax option). That's better than putting money into a Roth IRA.

Your fund options are good and expenses low. Allocation will depend on your age, risk tolerance, and what your other investments look like.

[NoHeat]

Those are good low-fee index funds.

The 2050 target-date fund is 15% bonds, and the glidepath for years thereafter is fairly conventional. If you like the allocation, it’s a good simple choice.
https://www.retirement.prudential.com/R ... UPSB50.pdf

You probably don’t want a stable value fund at this early point in your life, that’s better for retirement years.

Roth vs pre-tax decision depends on your tax bracket (marginal tax rate). If you think your bracket is at its lowest now and likely to go up in the future, a Roth account of some form would be better than pre-tax, even if it means contributing fewer dollars due to the lack of an immediate tax break.

[cloneman33]

Sounds like you have a long time Horizon mentioning the 2050 fund so assuming 30 years to desired retirement. In that case you should be at least 80% equities. You can justify 20% in bonds to balance stock market risk. Of the vehicles you mentioned I would use the Roth 401 after tax $’s in and Tax Free coming out.

I would recommend diversifying across equity assets. Maybe 20% each in S&P 500, S&P Midcap, Russell 2000, and International. Final 20% in Bond Fund. Single most important thing is start now, put in as much as you can and systematically invest each check so you average in over market highs and lows. Best of luck and you are doing a very good thing for your future!

[lakpr]

I would recommend diversifying across equity assets. Maybe 20% each in S&P 500, S&P Midcap, Russell 2000, and International. Final 20% in Bond Fund.

This would SIGNIFICANTLY overweight the Mid-Cap funds at the expense of Large-Cap funds. The Rusell-2000, International, and Bond funds getting 20% each is perhaps OK.

I'd advise the OP to follow the Wiki recommendation: https://www.bogleheads.org/wiki/Approxi ... ock_market

81% Vanguard 500 Index Fund (VFINX)
4% Vanguard Mid-Cap Index Fund (VIMSX)
15% Vanguard Small-Cap Index Fund (NAESX)

or

82% Vanguard 500 Index Fund (VFINX)
18% Vanguard Small-Cap Index Fund (NAESX)

or go with a slight tilt towards small-cap, omit the mid-cap altogether, in a 80:20 ratio.

[_Rocco_]

I appreciate all of your responses. The opinions and different perspectives are truly wonderful.

My spouse and I made about $75K this year. This should increase every year and eventually max out, but I don't see us ever being over 24%. If all goes accordingly I can retire at 55 with a pension, thus I have thirty years or so to save. My wife is currently invested in a 401K with a company match up to 6%.

I would like to be at 80% equities, if not more, as I have the risk tolerance. Diversifying across assets seems like the Boglehead way. The target date fund could be an attractive option although, but in Roth or Pre-Tax?

by lakpr » Sun Feb 17, 2019 9:00 pm

I'd advise the OP to follow the Wiki recommendation: https://www.bogleheads.org/wiki/Approxi ... ock_market

lakpr, are you suggesting I bag the company 401k altogether and invest fully in my Vanguard Roth?

[Flyer24]

https://www.bogleheads.org/wiki/Traditional_versus_Roth

[lakpr]

_Rocco_,

1. That tidbit of information in your last post, that you are only drawing $75K combined between you and your wife, clinches the case that you should be contributing to Roth 401k, and/or Roth IRA. You are in the 12% bracket, so it's a no-brainer that you pay the taxes in this low bracket now. If you ever graduate into the 22% tax bracket (that would be a taxable income of more than $110K in today's dollars + inflation adjustments), you should be contributing to Traditional 401k AND Roth IRA.

Do read the link that Flyer24 has posted

lakpr, are you suggesting I bag the company 401k altogether and invest fully in my Vanguard Roth?

2. Quite the opposite actually. Your 401k choices are EXCELLENT, so realistically there is no difference between contributing to your 401k or having an individual Roth IRA at Vanguard. I'd prefer 401k, because of the in-built strong ERISA protections (even if you declare bankruptcy, funds in 401k accounts cannot be accessed by your creditors), and also because the IRAs are not protected similarly. Especially in California. If you are ever at the stage where you have maxed out the $19K per year in your 401k AND still have money left to invest, only then look at Roth IRAs

Edited to add: I noticed only now that in your original post you said you are contributing only 3% of your pay. I *strongly urge you* to increase that to at least 10%, preferably 15%

[_Rocco_]

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Thank you for this. It does make sense as to why I would choose a Roth.


To lakpr, I think I can manage 10%. I was planning to contribute more than the default of 3%. You make a good argument to contribute to the Roth 401K. Which fund/s would you allocate?

Can anyone else chime in on the allocation of funds in the Roth 401k? Target fund or equities?

[lakpr]

The Bright Horizon Target Date fund of 0.07% expense ratio is excellent, it'd be a fire-and-forget approach.
If you do want to tinker, I'd suggest

70% to S&P 500 Equity Index Fund (.02)
20% to Russel 2000 Index Fund (.02)
10% to Bond Market Index Fund (.02)

Once you reach age 35, you will need to rebalance to at least 20% to bonds, at which time I'd suggest you adjust your holdings to:

60% to S&P 500 Equity Index Fund (.02)
20% to Russel 2000 Index Fund (.02)
20% to Bond Market Index Fund (.02)

Simple 3-fund portfolio.

The advantage of choosing a 3-fund portfolio over a Target Date fund is that you get the same performance for 1/3rd the cost.
But that difference is pennies ... $5 over a $10000 investment per year. A cup of latte per year buys you automatic rebalancing.

[Thecallofduty]

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Thank you for this. It does make sense as to why I would choose a Roth.


To lakpr, I think I can manage 10%. I was planning to contribute more than the default of 3%. You make a good argument to contribute to the Roth 401K. Which fund/s would you allocate?

Can anyone else chime in on the allocation of funds in the Roth 401k? Target fund or equities?

A target date fund with expense ratio of 0.07 is really good. If your happy with the allocation I would set it and forget it.

[02nz]

Lakpr makes good points on Roth IRA vs Roth 401k, but I'd add that a Roth IRA can serve as an emergency fund, as you can withdraw the original contribution (but not growth) at any time for any reason. That's not generally true of the Roth 401k while you're with that employer. So this may allow you to put more toward retirement in tax-advantaged accounts, by putting money that you might otherwise gone into an emergency fund into a Roth IRA.

To be clear: I don't recommend withdrawing from a Roth IRA except as a last resort, and it's better to make the Roth IRA your secondary, not primary emergency fund. But if the choice is between filling and not filling the tax-advantaged space, this is something to keep in mind.

More here: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

[ruralavalon]

Hello all,

Good evening. I was hoping to gain a bit of knowledge from the wonderful world of Bogleheads.

I have recently been employed by a company that offers a 401K Tax Deferred Savings Plan through Prudential but does not provide a company match. If I wanted to "set-it-and-forget-it", I assume I should go with the default contribution rate of 3%, Pre-Tax, in the Bright Horizon 2050 Fund.

The Plan offers multiple Elective Deferrals. These include Employee Pre-Tax, Roth 401(K), Option Week, Roth Option Week, and After-Tax (Non-Roth), in which I can contribute up to a certain amount to each per pay period.

Would contributing only Pre-Tax be the best option? While leaving the rest at 0%?


Once contribution amounts are selected, I am to choose an allocation to the fund/s I would like to invest in. While a Target Date Fund (.07) is an option, others include:
(.xx) = Expense Ratio

Stable Value Fund (.04)
Government Short-Term Investment Fund (.05)
Bond Market Index Fund (.02)
Balanced Fund (.04)
S&P 500 Equity Index Fund (.02)
S&P 400 Midcap Index Fund (.01)
Russel 2000 Index Fund (.02)
International Index Fund (.03)
US Reit Index Fund (.05)


I do not have any investments at the moment. I have a Roth IRA with Vanguard but have not made any contributions.

Does anyone suggest a better portfolio? 3-Fund? I am curious to hear from you.

Thanks,
Rocco

I appreciate all of your responses. The opinions and different perspectives are truly wonderful.

My spouse and I made about $75K this year. This should increase every year and eventually max out, but I don't see us ever being over 24%. If all goes accordingly I can retire at 55 with a pension, thus I have thirty years or so to save. My wife is currently invested in a 401K with a company match up to 6%.

I would like to be at 80% equities, if not more, as I have the risk tolerance. Diversifying across assets seems like the Boglehead way. The target date fund could be an attractive option although, but in Roth or Pre-Tax?

by lakpr » Sun Feb 17, 2019 9:00 pm

I'd advise the OP to follow the Wiki recommendation: https://www.bogleheads.org/wiki/Approxi ... ock_market

lakpr, are you suggesting I bag the company 401k altogether and invest fully in my Vanguard Roth?

You have excellent funds offered in your 401k plan. You are fortunate. You should definitely contribute to that plan.


Asset allocation.
With 30 years to retirement your idea of 80% stocks and 20% bonds is within the range of what is reasonable in my opinion.

I suggest around 20-30% of stocks in international stocks.

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks.


Fund selection.
I suggest these investing in these funds in your 401k:
1) 60%, S&P 500 Equity Index Fund, ER 0.02%;
2) 20%, International Index Fund, ER 0.03%; and
3) 20%, Bond Market Index Fund, ER 0.02%.

I suggest a total stock market index fund where available, otherwise a S&P 500 index fund is good enough by itself for investing in U.S. stocks.

A S&P 500 index fund covers 81% of the domestic stock market, investing in stocks of selected large-cap and mid-cap U.S. companies. In the 27 years since the creation of the first total stock market index fund the performance of the two types of funds has been almost identical.
right Horizons target date fund instead would also be reasonable. .hat index is used by the International Index Fund?

What index is used by the Bond Market Index Fund?

OR using the Bright Horizons target date fund instead would also be reasonable.


Roth vs traditional?
I suggest Roth contributions to your 401k plan. Your tax bracket is currently fairly low, and you will be eligible for a pension. Please Google the TFB blog post "TSP Participants Should Switch to the Roth TSP". That discusses the effect of a federal pension, but the reasoning also applies to a private sector pension.


Contributions.
I suggest contributing as much as practical for you to your 401k. The maximum annual limit is $19k for employee contributions.

The funds offered in your 401k plan have even lower expense ratios than you could get in an IRA at Vanguard. Also the 401k has the benefit of automatic payroll deductions to make investing easy.

Maintaining a high contribution rate is probably the most important thing you can do at this point. That's more important than any other investing decision you can make.

. . . . .

I suggest that you read one or two books on general investing. Please see the wiki article "Books: Recommendations and Reviews".

If you have any questions just ask.

I hope that this helps.