Exchanging investments in Fidelity 401(k) to reduce ER

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
afosiosi
Posts: 3
Joined: Tue Jun 04, 2019 12:15 pm

Exchanging investments in Fidelity 401(k) to reduce ER

Post by afosiosi » Tue Jun 04, 2019 1:18 pm

Hello,

I have been a long time lurker and have learned a ton from the community here, but wanted to get some input on my fund choice in my 401(k). Admittedly, I haven't reviewed my 401(k) fund choice in quite some time, as I opted to use a target date fund when I was uncertain about what to choose. I've included my background and have a few questions below on fund choice in my 401(k).

Background
Emergency funds: 6 months expenses in Ally savings account
Debt: $1.5K left on car loan (0.9% APR)
Tax Filing Status: Single
State of Residence: CA
Age: 29
Desired Asset allocation: 80-90% stocks / 10-20% bonds
Desired International allocation: 20-30% of stocks

Current retirement assets

Taxable at Vanguard (~$150K)
~50% VTSAX (0.04% ER)
~20% VTIAX (0.11% ER)
~30% VBTLX (0.05% ER)

Fidelity 401k (~$185K - account with fund in question)
100% FID FREEDOM 2055 K (FNSDX) (0.65% ER)
Company adds ~4-5% of salary per year (part of profit share)

Roth IRA at Vanguard (~$45K)
100% Vanguard Target Retirement 2055 Fund (VFFVX) (0.15% ER)

Contributions

New annual Contributions
$19K 401k (+ ~$9K employer annual contributions)
$6K Roth IRA (last 2 years as backdoor)
~$20K taxable (for retirement / longer term)

Available funds in Fidelity 401(k)

Fidelity® 500 Index Fund (FXAIX) (0.015% ER)
Fidelity® U.S. Bond Index Fund (FXNAX) (0.025% ER)
Fidelity®International Index Fund (FSPSX) (0.035% ER)
Fidelity® Extended Market Index Fund (FSMAX) (0.045% ER)
American Funds AMCAP Fund®Class R-6 (RAFGX) (0.36% ER)
Fidelity Freedom®2005 Fund - Class K (FSNJX) (0.42% ER)
Fidelity Freedom®Income Fund - Class K (FNSHX) (0.42% ER)
Fidelity®Government Money Market Fund (SPAXX) (0.42% ER)
Invesco Diversified Dividend Fund Class R6 (LCEFX) (0.42% ER)
Fidelity® Balanced Fund - Class K (FBAKX) (0.45% ER)
Fidelity® Capital Appreciation Fund - Class K (FCAKX) (0.45% ER)
Fidelity® Total Bond Fund (FTBFX) (0.45% ER)
Fidelity Freedom®2010 Fund - Class K (FSNKX) (0.46% ER)
American Funds EuroPacific Growth Fund® Class R-6 (RERGX) (0.49% ER)
Fidelity Freedom®2015 Fund - Class K (FSNLX) (0.49% ER)
Fidelity Freedom®2020 Fund - Class K (FSNOX) (0.53% ER)
Fidelity Freedom®2025 Fund - Class K (FSNPX) (0.56% ER)
Fidelity Freedom®2030 Fund - Class K (FSNQX) (0.6% ER)
Columbia Contrarian Core Fund Institutional 3 Class (COFYX) (0.63% ER)
Fidelity Freedom®2035 Fund - Class K (FSNUX) (0.63% ER)
Loomis Sayles Strategic Income Fund Class N (NEZNX) (0.63% ER)
Fidelity Freedom®2040 Fund - Class K (FSNVX) (0.65% ER)
Fidelity Freedom®2045 Fund - Class K (FSNZX) (0.65% ER)
Fidelity Freedom®2050 Fund - Class K (FNSBX) (0.65% ER)
Fidelity Freedom®2055 Fund - Class K (FNSDX) (0.65% ER) - Current fund I am invested in
Fidelity Freedom®2060 Fund - Class K (FNSFX) (0.65% ER)
Janus Henderson Triton Fund Class N (JGMNX) (0.66% ER)
Fidelity® Capital & Income Fund (FAGIX) (0.67% ER)
MFS Mid Cap Value Fund Class R6 (MVCKX) (0.69% ER)
MassMutual Select Mid Cap Growth Fund Class I (MEFZX) (0.71% ER)
Invesco Oppenheimer Developing Markets Fund Class R6 (ODVIX) (0.85% ER)
Invesco Oppenheimer International Small-Mid Company Fund Class R6 (OSCIX) (0.93% ER)
Northern Small Cap Value Fund (NOSGX) (1% ER)

Context:
I started this 401(k) right after starting my job out of university ~6.5 years ago, and came to the conclusion of using a simplistic target date fund to ensure I would just get started on investing vs. getting bogged down with complexity. However, I did not notice this was actively managed, and mistakenly thought it was a target date index fund. I noticed this after reviewing this recently, which leads me to my below questions.

Questions:
1. Would you recommend moving all of my current 401(k) portfolio into a mix of lower cost index funds as part of a 3-fund portfolio (my inclination is yes to do this immediately to reduce fees I'm paying which will only become more important?

2. If yes to my last question, should I immediately exchange all of my ~$185K in my 401(k) into this 3 fund portfolio at one time or should this be done over time? (Note I've already maxed out my 401(k) this year, so new contributions into lower ER funds wouldn't be until next year)

3. What would you recommend as funds to choose based on what is available in my 401(k)? My initial thoughts are:
- ~48%: Fidelity® 500 Index Fund (FXAIX) (0.015% ER)
- ~12%: Fidelity® Extended Market Index Fund (FSMAX) (0.045% ER) - use this to get stocks outside S&P 500 (~20% of domestic stocks)
- ~30%: Fidelity® International Index Fund (FSPSX) (0.035% ER)
- ~10%: Fidelity® U.S. Bond Index Fund (FSNAX) (0.025%)

4. Given I am doing a Roth backdoor IRA each year, if I leave my current employer, would you recommend keeping my 401(k) at Fidelity (vs. moving over to an IRA at Vanguard)? I am under the impression that rolling over my 401(k) into an IRA at Vanguard would make a Backdoor Roth unfeasible / challenging.

Appreciate any input and any other potential financial advise based on my situation!

User avatar
Tyler Aspect
Posts: 1568
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by Tyler Aspect » Tue Jun 04, 2019 1:32 pm

The following two funds should be sufficient in 401k program to make up a three funds portfolio.

Fidelity® 500 Index Fund (FXAIX) (0.015% ER)
Fidelity® U.S. Bond Index Fund (FXNAX) (0.025% ER)

S&P 500 is 80% similar to US total stock market. International stocks need to be in a taxable account for you to be able to claim the foreign income tax credit.

Do not rollover your 401k after leaving your current job. It could complicate your future backdoor Roth IRA conversions.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

carmonkie
Posts: 151
Joined: Fri Jun 29, 2018 4:31 pm

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by carmonkie » Tue Jun 04, 2019 1:48 pm

You have excellents choices to make a 3-fund portfolio.

1) Now that you have more information in term of fees, I would do it
2) I would do it all at once as this is not a taxable event. You will have the same balance give or take a few $$ after everything settles.
3) I did not look at the percentages, but the chosen funds will give you a good 3 fund portfolio. I do not have international bonds. There is a lot of debate if they are needed for a US biased investors. I think this is a personal choice, Vanguard suggest some Int Bond, I chose not to, one less fund to manage.
4) You can leave it in Fidelity or Roll it over to your new employer if they allow a 401(k) rollover and if the fees and funds are good. No need to worry about this now, but if rolled over to IRA it will present issues for doing a Backdoor.

5) I am going to throw a wrench here and this will affect how you re-allocate your percentages and that is why I did not look at them in #3.
You have bonds in taxable account. You are paying taxes on the dividends at ordinary tax for a slow growth asset, for this reason, it is recommended to have bonds in 401(k). Most of the tax is in Dividends so selling should not trigger a big Capital Gains, but check first. So you can redistribute the % of bonds to your 401(k) and then with the bond proceeds buy either VTSAX and VTIAX to get you back to your desired AA.

5a) Wrench #2,
You have a Target Fund in Roth, nothing wrong with it, but you want high growth potential assets, SM Cap, Real-Estate, Total US or Total Int, there as those growth tax free. Something to think about as you plan your asset allocation and asset placement. Maybe you want to tackle your Roth Later on once you get your Taxable and 401(k) in order.

At the end all your investment accounts should look like one...

carmonkie
Posts: 151
Joined: Fri Jun 29, 2018 4:31 pm

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by carmonkie » Tue Jun 04, 2019 1:58 pm

If you do end-up selling bonds in Taxable, check for any losses. I believe the wash rule will apply if you buy back in the 401(k) within 30 days for substantially identical” securities. Because this is just a bond component, you can park the money for 30 days in a money market.

lakpr
Posts: 3079
Joined: Fri Mar 18, 2011 9:59 am

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by lakpr » Tue Jun 04, 2019 2:07 pm

carmonkie wrote:
Tue Jun 04, 2019 1:58 pm
If you do end-up selling bonds in Taxable, check for any losses. I believe the wash rule will apply if you buy back in the 401(k) within 30 days for substantially identical” securities. Because this is just a bond component, you can park the money for 30 days in a money market.
Not true. The IRS has explicitly mentioned the IRAs as included in the wash sale rule, but has been silent for over two decades with regards to buying the same securities within 401k / 403b plans. Buy away in your workplace plan!!!

cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by cherijoh » Tue Jun 04, 2019 2:29 pm

carmonkie wrote:
Tue Jun 04, 2019 1:48 pm
You have excellents choices to make a 3-fund portfolio.

1) Now that you have more information in term of fees, I would do it
2) I would do it all at once as this is not a taxable event. You will have the same balance give or take a few $$ after everything settles.
3) I did not look at the percentages, but the chosen funds will give you a good 3 fund portfolio. I do not have international bonds. There is a lot of debate if they are needed for a US biased investors. I think this is a personal choice, Vanguard suggest some Int Bond, I chose not to, one less fund to manage.
4) You can leave it in Fidelity or Roll it over to your new employer if they allow a 401(k) rollover and if the fees and funds are good. No need to worry about this now, but if rolled over to IRA it will present issues for doing a Backdoor.

5) I am going to throw a wrench here and this will affect how you re-allocate your percentages and that is why I did not look at them in #3.
You have bonds in taxable account. You are paying taxes on the dividends at ordinary tax for a slow growth asset, for this reason, it is recommended to have bonds in 401(k). Most of the tax is in Dividends so selling should not trigger a big Capital Gains, but check first. So you can redistribute the % of bonds to your 401(k) and then with the bond proceeds buy either VTSAX and VTIAX to get you back to your desired AA.

5a) Wrench #2,
You have a Target Fund in Roth, nothing wrong with it, but you want high growth potential assets, SM Cap, Real-Estate, Total US or Total Int, there as those growth tax free. Something to think about as you plan your asset allocation and asset placement. Maybe you want to tackle your Roth Later on once you get your Taxable and 401(k) in order.

At the end all your investment accounts should look like one...
+1

I agree that you want your overall AA to match your target, not each individual category of investment (i.e., taxable, 401k, Roth IRA). And since you are already invested in the market with a similar AA just do the changes all at once.

The best position for international is in taxable and if you sold all the bonds in taxable and moved it to international you would be very near the lower end of your target allocation for International. You should pay nominal capital gains on this, but I would verify before pulling the trigger. I would recommend turning off automatic reinvestment of dividends and cap gains in taxable. You can then manually reinvest and do some limited rebalancing (e.g., if international is down relative to TSM invest all the dividends paid out from both funds into International). You can also rebalance by directing more of your new money to an underperforming asset. In tax-advantaged accounts you can also sell one fund and buy another without tax consequences.

I would invest Roth 100% in VTSAX or a mix of VTSAX and International stock if you need more international in the future and don't want to sell VTSAX in taxable. Then figure out how much you want in bonds and put it all in your 401K. The rest can be a 4:1 ratio of Fido's s&P500 and Fido's Extended market. I don't recommend using S&P 500 fund for all of your domestic stock allocation since you are then overweighting large cap stocks.

FYI, international allocation is generally quoted as x% of stocks, NOT x% of total portfolio. That way you can keep the same balance of domestic to international as you increase your percentage going to bonds as you approach retirement.

User avatar
Duckie
Posts: 6896
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by Duckie » Tue Jun 04, 2019 4:11 pm

afosiosi, welcome to the forum.
afosiosi wrote:Age: 29
Desired Asset allocation: 80-90% stocks / 10-20% bonds
At your age I'd go with 80% stocks and 20% bonds.
Desired International allocation: 20-30% of stocks
I'd go with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds.
Taxable at Vanguard (~$150K)
~50% VTSAX (0.04% ER)
~20% VTIAX (0.11% ER)
~30% VBTLX (0.05% ER)
Bonds don't belong in a taxable account if you have room in tax-sheltered, and you have room.
Fidelity 401k (~$185K - account with fund in question)
100% FID FREEDOM 2055 K (FNSDX) (0.65% ER)
This is an expensive fund.
Available funds in Fidelity 401(k)
The best options are:
  • Fidelity 500 Index (FXAIX) (0.015%) -- Large caps, 80% of US stocks
  • Fidelity Extended Market Index (FSMAX) (0.045%) -- Mid/small caps, 20% of US stocks
  • Fidelity International Index (FSPSX) (0.035%) -- Developed markets, 75% of international stocks
  • Fidelity U.S. Bond Index (FXNAX) (0.025%) -- US bonds
Would you recommend moving all of my current 401(k) portfolio into a mix of lower cost index funds as part of a 3-fund portfolio (my inclination is yes to do this immediately to reduce fees I'm paying which will only become more important?
Yes.
If yes to my last question, should I immediately exchange all of my ~$185K in my 401(k) into this 3 fund portfolio at one time or should this be done over time? (Note I've already maxed out my 401(k) this year, so new contributions into lower ER funds wouldn't be until next year)
It's a lateral move so shift it all at once.
What would you recommend as funds to choose based on what is available in my 401(k)? My initial thoughts are:
- ~48%: Fidelity® 500 Index Fund (FXAIX) (0.015% ER)
- ~12%: Fidelity® Extended Market Index Fund (FSMAX) (0.045% ER) - use this to get stocks outside S&P 500 (~20% of domestic stocks)
- ~30%: Fidelity® International Index Fund (FSPSX) (0.035% ER)
- ~10%: Fidelity® U.S. Bond Index Fund (FSNAX) (0.025%)
I would not use FSPSX because it is only developed markets. I would put international in the Roth IRA and taxable. In taxable you can take advantage of the Foreign tax credit.
Given I am doing a Roth backdoor IRA each year, if I leave my current employer, would you recommend keeping my 401(k) at Fidelity (vs. moving over to an IRA at Vanguard)? I am under the impression that rolling over my 401(k) into an IRA at Vanguard would make a Backdoor Roth unfeasible / challenging.
Yes, if you quit either leave the assets in the plan or roll to a new employer plan. Don't roll to an IRA.
______________________

The following portfolio example has an AA of 56/24/20. Ignoring the potential tax-cost of selling in taxable, you could have:

Taxable at Vanguard -- $150K -- 39%
15% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
24% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

401k at Fidelity -- $185K -- 49%
23% (FXAIX) Fidelity 500 Index Fund (0.015%)
6% (FSMAX) Fidelity Extended Market Index Fund (0.045%) <-- This could be skipped.
20% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

Roth IRA at Vanguard (via backdoor) -- $45K -- 12%
12% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Just some possibilities.

Topic Author
afosiosi
Posts: 3
Joined: Tue Jun 04, 2019 12:15 pm

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by afosiosi » Tue Jun 04, 2019 5:06 pm

Thanks, all, I appreciate the insight. Still definitely learning and trying to wrap my head around everything!

Here are my thoughts on how to move forward:

1. Sell bonds (VBTLX) from taxable account and move all to international (VTIAX). This will get me close to international of ~30% of stocks in my total portfolio.

2. Change allocation of funds in my 401(k): purchase ~$65K in FSNAX to get my total portfolio bond allocation of ~20%. Allocate rest of my 401(k) into FXAIX and FXMAX (4:1 ratio)

3. Convert Roth IRA from VFFVX to VTSAX and VTIAX (enough VTIAX to get up to ~30% of stocks in total portfolio)

Today:

Image

This would leave me with:

Image

Questions
1. How can I validate nominal capital gains tax for selling my bonds (currently ~$30K)? A couple of you mentioned validating capital gains tax, but I have very limited experience with tax implications of selling in my taxable account (I have only bought and not sold at this point). Would be great for any direction on this. Is it as simple as selling my VBTLX and then immediately buying VTIAX?

2. As I contribute more to my taxable account, would you recommend I reduce VTIAX in my IRA (eventually having all international in taxable)?

Appreciate all the input during this learning process!

carmonkie
Posts: 151
Joined: Fri Jun 29, 2018 4:31 pm

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by carmonkie » Wed Jun 05, 2019 9:24 am

afosiosi wrote:
Tue Jun 04, 2019 5:06 pm
Thanks, all, I appreciate the insight. Still definitely learning and trying to wrap my head around everything!

Here are my thoughts on how to move forward:

1. Sell bonds (VBTLX) from taxable account and move all to international (VTIAX). This will get me close to international of ~30% of stocks in my total portfolio.

2. Change allocation of funds in my 401(k): purchase ~$65K in FSNAX to get my total portfolio bond allocation of ~20%. Allocate rest of my 401(k) into FXAIX and FXMAX (4:1 ratio)

3. Convert Roth IRA from VFFVX to VTSAX and VTIAX (enough VTIAX to get up to ~30% of stocks in total portfolio)

Today:

Image

This would leave me with:

Image

Questions
1. How can I validate nominal capital gains tax for selling my bonds (currently ~$30K)? A couple of you mentioned validating capital gains tax, but I have very limited experience with tax implications of selling in my taxable account (I have only bought and not sold at this point). Would be great for any direction on this. Is it as simple as selling my VBTLX and then immediately buying VTIAX?

2. As I contribute more to my taxable account, would you recommend I reduce VTIAX in my IRA (eventually having all international in taxable)?

Appreciate all the input during this learning process!
It looks like a solid plan,

1) Under My Account, look for Cost basis link.. On the taxable account look for VBTLX and you will see the Capital Gain Loss/Gain column, that is what you want to see. Hopefully your Gains are low to non-existent or mainly Long Term..

2) No, the nice thing about the 3-fund is that as you add new money, it will tell you where it needs to go. Sometimes it will go to US Total, other to International, others to 1/2 and 1/2. Based on the excel screen shots you sent in, it looks like you have that part figured it out.

It is also OK to sell equities in the 401(k) to buy bonds or vice-versa as they drift apart from your desired AA. You can do this on your b-day or at the end of the year. Set it and forget it.

You will have a very simple and easy portfolio to manage.

Topic Author
afosiosi
Posts: 3
Joined: Tue Jun 04, 2019 12:15 pm

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by afosiosi » Wed Jun 05, 2019 12:33 pm

carmonkie wrote:
Wed Jun 05, 2019 9:24 am
afosiosi wrote:
Tue Jun 04, 2019 5:06 pm
Thanks, all, I appreciate the insight. Still definitely learning and trying to wrap my head around everything!

Here are my thoughts on how to move forward:

1. Sell bonds (VBTLX) from taxable account and move all to international (VTIAX). This will get me close to international of ~30% of stocks in my total portfolio.

2. Change allocation of funds in my 401(k): purchase ~$65K in FSNAX to get my total portfolio bond allocation of ~20%. Allocate rest of my 401(k) into FXAIX and FXMAX (4:1 ratio)

3. Convert Roth IRA from VFFVX to VTSAX and VTIAX (enough VTIAX to get up to ~30% of stocks in total portfolio)

Today:

Image

This would leave me with:

Image

Questions
1. How can I validate nominal capital gains tax for selling my bonds (currently ~$30K)? A couple of you mentioned validating capital gains tax, but I have very limited experience with tax implications of selling in my taxable account (I have only bought and not sold at this point). Would be great for any direction on this. Is it as simple as selling my VBTLX and then immediately buying VTIAX?

2. As I contribute more to my taxable account, would you recommend I reduce VTIAX in my IRA (eventually having all international in taxable)?

Appreciate all the input during this learning process!
It looks like a solid plan,

1) Under My Account, look for Cost basis link.. On the taxable account look for VBTLX and you will see the Capital Gain Loss/Gain column, that is what you want to see. Hopefully your Gains are low to non-existent or mainly Long Term..

2) No, the nice thing about the 3-fund is that as you add new money, it will tell you where it needs to go. Sometimes it will go to US Total, other to International, others to 1/2 and 1/2. Based on the excel screen shots you sent in, it looks like you have that part figured it out.

It is also OK to sell equities in the 401(k) to buy bonds or vice-versa as they drift apart from your desired AA. You can do this on your b-day or at the end of the year. Set it and forget it.

You will have a very simple and easy portfolio to manage.
Thanks, carmonkie.

It looks like for my taxable VBTLX I have $245 in short term capital gains, and $420 long term capital gains which doesn't seem huge to pay tax on this now.

It looks like from the cost basis page, I can simply exchange here from VBTLX to VTIAX, is that correct?

If so, do you recommend using "average cost" for the cost basis method? For my capital gains, this would all be handled on 1099 I receive in January 2020?

User avatar
Duckie
Posts: 6896
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Exchanging investments in Fidelity 401(k) to reduce ER

Post by Duckie » Wed Jun 05, 2019 6:01 pm

afosiosi wrote:It looks like for my taxable VBTLX I have $245 in short term capital gains, and $420 long term capital gains which doesn't seem huge to pay tax on this now.
Your taxes will be reasonable.
It looks like from the cost basis page, I can simply exchange here from VBTLX to VTIAX, is that correct?
If you're on the mutual fund side of Vanguard, yes, you can exchange. If you're on the brokerage side, you can try to exchange but I think you will have to sell VBTLX, send the cash to the settlement fund, then buy VTIAX.
If so, do you recommend using "average cost" for the cost basis method?
If you're going to sell ALL of VBTLX in your taxable account it doesn't matter which cost basis method you use.
For my capital gains, this would all be handled on 1099 I receive in January 2020?
Yes, it will show up on your 1099-B (or maybe a consolidated 1099).

Post Reply