First real job 401k. Please help dissect my options :)

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Topic Author
radzoo
Posts: 5
Joined: Mon Aug 12, 2019 10:05 pm

First real job 401k. Please help dissect my options :)

Post by radzoo » Mon Aug 12, 2019 10:46 pm

Starting a new job with an actual 401k and have been overwhelmed by the informational packets and wanted to get some expert opinion. This is my first real job so all is new to me but I have been lurking on the forums and trying to learn as much as possible prior to getting to this point. I would love some help on some of the nuances of my options.

I am just beginning my career and am comfortable leaning a little more agressive. Based on some books/blogs my ideal allocation would be around 70% US stocks, 15% international, 15% fixed/bonds. I was been hoping to find Vanguard funds but my options from my employer had mostly funds with higher ERs esp for any international options.

Also the fees seem high but are they high enough to just do the minimum contribution (employer matches 1:1 up to 4%, then 50% up to 6%). Was planning on deferring 10% income but would reconsider if there are better alternatives.

Fee Summary
- Administrative fees $50/year (1/12th deducted/mon)
- "Additional Plan expenses" – typically based on balance but may represent total cost divided by total participants.There is no approximation of how this is calculated or what this is!
- Distribution fee $50
- Loan maintenance fee for new loans: $12/quarter
- Loan setup fee: $100
- Qualified domestic relations order: $220.00/hr for each order reviewed
- Qualified domestic relations order processing fee: $350 for each order processed


Investment options
Short-term Fixed income
- Principal Stable Value Z Fund (ER 0.37, 10yr avg 1.85)
Fixed
- PIMCO Income Insitutional Fund (ER 0.74, 10 yr avg 10.43)
- Vanguard High-Yield Corporate Adm Fund (ER 0.13, 10 yr avg 9.49)
- PIMCO Total Return Instl Fund (ER 0.55, 10 yr avg 4.84)
- Vanguard Intermediate-Term Treasury Adm Fund (ER 0.10, 10 yr avg 2.70)
- MFS Corporate Bond R6 Fund (ER 0.45, 10 yr 7.30)
Default allocation
- Target Date fund (ER 0.24) which looks like it is benchmarked with a Morningstar Lifetime moderate index.

Large US
- Vanguard Institutional Index Institutional (ER 0.04, 10 yr avg 15.90)
- LargeCap Growth I Separate Account (ER 0.38, 10 yr avg 18.91)
Mid US
- MidCap S&P 400 Index Separate Account (ER 0.05, 10 yr avg 16.15)
Small US
- SmallCap S&P 600 Index Separate Account (0.05, 10 yr average 16.89)
Diversified Emerging
- Oppenheimer Developing Markets Institutional Fund (ER 0.87, 10 yr average 11.54)
Foreign Large Growth
- American Funds EuroPacific Growth R6 (ER 0.49, 10 yr avg 9.94)

Based on my goals (70% US stocks, 15% international, 15% fixed/bonds) I was planning on excluding international exposure due to the high ERs of my options compared to Vanguard equivalents. Is this enough of a deterrant?

I was planning on adjusting my allocation to the following:

10% -Vanguard High Yield Corporate Adm Fund (0.13 ER 9.49% 10 yr)
5% - Vanguard Intermediate term treasury (0.10. ER, 2.7% 10 yr)
65% Vanguard Insitutional index institutional fund (0.04% ER 15.90% 10 yr)
20% MidCap S&P600 Index separate Account (.05% ER, 16.89 10 yr)


I would love to hear any thoughts and opinions on my proposed allocation. Thank you in advance.

DarkHelmetII
Posts: 364
Joined: Mon Jul 24, 2017 12:25 pm

Re: First real job 401k. Please help dissect my options :)

Post by DarkHelmetII » Tue Aug 13, 2019 6:32 am

My 2 cents:

1) Make bonds 10% intermediate term treasury and high yield bonds 5%. Quite minor I realize, but high-yield bonds have quasi-equity-like performance so I think will be more meaningful to have a greater portion of the "safe" bond variety.
2) With the international options I agree in taking a pass. It's not just the ER's, but also my concern is of fund managers "chasing" returns as opposed to a vanilla indexing strategy. Down the road, consider working in a little international if better 401k options become available and / or you have "extra" money to invest in a taxable account, IRA, or HSA.

sjt
Posts: 241
Joined: Fri May 26, 2017 3:03 pm
Location: NC

Re: First real job 401k. Please help dissect my options :)

Post by sjt » Tue Aug 13, 2019 6:37 am

radzoo wrote:
Mon Aug 12, 2019 10:46 pm

Based on my goals (70% US stocks, 15% international, 15% fixed/bonds) I was planning on excluding international exposure due to the high ERs of my options compared to Vanguard equivalents. Is this enough of a deterrant?
I don't think your fees are bad - just use the lower ER funds like you propose. Keep in mind, if you don't have the options you want in 401(k), you can get your international exposure in another account like IRA, Roth IRA, or Taxable.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

HawkeyePierce
Posts: 526
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: First real job 401k. Please help dissect my options :)

Post by HawkeyePierce » Tue Aug 13, 2019 6:41 am

Personally I’d skip the high yield bonds and just use the intermediate treasury fund for your bond allocation.

Junk bonds don’t provide the ballast your looking for in a bond allocation, treasuries do.

Flyer24
Posts: 969
Joined: Sun Apr 08, 2018 4:21 pm

Re: First real job 401k. Please help dissect my options :)

Post by Flyer24 » Tue Aug 13, 2019 7:41 am

Those fees are very reasonable. Don’t let that hinder you from contributing more. Make it a goal to set at least 15% aside in retirement accounts.

You might edit to give us more information using the following format.
viewtopic.php?f=1&t=6212

Independent George
Posts: 465
Joined: Wed Feb 17, 2016 12:13 pm

Re: First real job 401k. Please help dissect my options :)

Post by Independent George » Tue Aug 13, 2019 10:32 am

1. The account fees are very reasonable, the match is quite generous, and you have some great fund options. Congratulations!
2. Since you are just starting out, I assume you are in a low tax bracket. Consider opening a Roth IRA to get your international exposure.
3. The preferred contribution order generally goes as follows: 401k up to the match first (6% in your case), followed by HSA contributions, then Roth IRA, then the remaining 401k space. Since you have projected saving 10%, you can probably (depending on income) open a Roth IRA with the remaining cash.
4. While the above scenario is mathematically optimal, that is not always the best. There is something to be said for putting it all in your 401k right now; there is a very real psychological benefit to seeing your balance grow, as it encourages more savings in the future.
5. All that said, the single most important thing is to live below your means and save, which you seem to be doing. Keep at it, and you'll be fine; everything else is just tweaking the details.

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ruralavalon
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Location: Illinois

Re: First real job 401k. Please help dissect my options :)

Post by ruralavalon » Tue Aug 13, 2019 11:49 am

? Welcome to the forum :) .

Congratulations on your new job. You have some nice fund choices in your 401k, you are fortunate.

The plan fees are not high based on what you posted. Don't be reluctant to contribute to your 401 based on that.

Contribute enough to your 401k to get the full employer match every year. If you can afford to contribute more to investing, then (if eligible) open an IRA at a low cost provider like Vanguard or Fidelity and contribute up to $6k annually. Wiki article, "Prioritizing Investments".

There are income limits for eligibility to contribute to IRAs. What is your tax filing status? What is your annual income? Your modified AGI if you know that?

IRS, "2019 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work".

IRS, "Amount of Roth IRA Contributions That You Can Make For 2019".

Contribute as much as practical to investing, when starting out establishing a high contribution rate is the most important investing decision you can make.



radzoo wrote:
Mon Aug 12, 2019 10:46 pm
Starting a new job with an actual 401k and have been overwhelmed by the informational packets and wanted to get some expert opinion. This is my first real job so all is new to me but I have been lurking on the forums and trying to learn as much as possible prior to getting to this point. I would love some help on some of the nuances of my options.

I am just beginning my career and am comfortable leaning a little more agressive. Based on some books/blogs my ideal allocation would be around 70% US stocks, 15% international, 15% fixed/bonds. I was been hoping to find Vanguard funds but my options from my employer had mostly funds with higher ERs esp for any international options.

Also the fees seem high but are they high enough to just do the minimum contribution (employer matches 1:1 up to 4%, then 50% up to 6%). Was planning on deferring 10% income but would reconsider if there are better alternatives.

Fee Summary
- Administrative fees $50/year (1/12th deducted/mon)
- "Additional Plan expenses" – typically based on balance but may represent total cost divided by total participants.There is no approximation of how this is calculated or what this is!
- Distribution fee $50
- Loan maintenance fee for new loans: $12/quarter
- Loan setup fee: $100
- Qualified domestic relations order: $220.00/hr for each order reviewed
- Qualified domestic relations order processing fee: $350 for each order processed


Investment options
Short-term Fixed income
- Principal Stable Value Z Fund (ER 0.37, 10yr avg 1.85)
Fixed
- PIMCO Income Insitutional Fund (ER 0.74, 10 yr avg 10.43)
- Vanguard High-Yield Corporate Adm Fund (ER 0.13, 10 yr avg 9.49)
- PIMCO Total Return Instl Fund (ER 0.55, 10 yr avg 4.84)
- Vanguard Intermediate-Term Treasury Adm Fund (ER 0.10, 10 yr avg 2.70)
- MFS Corporate Bond R6 Fund (ER 0.45, 10 yr 7.30)
Default allocation
- Target Date fund (ER 0.24) which looks like it is benchmarked with a Morningstar Lifetime moderate index.

Large US
- Vanguard Institutional Index Institutional (ER 0.04, 10 yr avg 15.90)
- LargeCap Growth I Separate Account (ER 0.38, 10 yr avg 18.91)
Mid US
- MidCap S&P 400 Index Separate Account (ER 0.05, 10 yr avg 16.15)
Small US
- SmallCap S&P 600 Index Separate Account (0.05, 10 yr average 16.89)
Diversified Emerging
- Oppenheimer Developing Markets Institutional Fund (ER 0.87, 10 yr average 11.54)
Foreign Large Growth
- American Funds EuroPacific Growth R6 (ER 0.49, 10 yr avg 9.94)

Based on my goals (70% US stocks, 15% international, 15% fixed/bonds) I was planning on excluding international exposure due to the high ERs of my options compared to Vanguard equivalents. Is this enough of a deterrant?

I was planning on adjusting my allocation to the following:

10% -Vanguard High Yield Corporate Adm Fund (0.13 ER 9.49% 10 yr)
5% - Vanguard Intermediate term treasury (0.10. ER, 2.7% 10 yr)
65% Vanguard Insitutional index institutional fund (0.04% ER 15.90% 10 yr)
20% MidCap S&P600 Index separate Account (.05% ER, 16.89 10 yr)


I would love to hear any thoughts and opinions on my proposed allocation. Thank you in advance.
In my opinion your desired asset allocation (70% US stocks, 15% international, 15% fixed/bonds) is within the range of what is reasonable.

My suggestion for your 401k is this:
1) Vanguard Institutional Index Institutional (a S&P 500 index fund, 82% of U.S.stock market) (VINIX) ER 0.04%;
2) American Funds EuroPacific Growth R6 (RERGX) ER 0.49%; and
3) Vanguard Intermediate term treasury (VFIUX) ER 0.10%.


Domestic stocks.
For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough by itself for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

In my opinion in a plan that lacks a total stock market index fund, a S&P 500 index fund (such as Vanguard Institutional Index Institutional, VINIX, in your 401k) is good enough by itself for a domestic stock allocation. A S&P 500 index fund covers 82% of the U.S. 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. Morningstar, "growth of $10k" graph (1992 – 2019), VTSAX vs VFIAX. In the first 10 years the S&P 500 fund did better, in the last 10 years the they have been about the same (on a $10,000 investment the difference was $13 a year), and over the 27 years the total market fund gave a little more return. So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

See also:
1) Allan Roth, CBS Moneywatch (02/03/2010), "John C. Bogle on the S&P 500 vs. the Total Stock Market"; and
2) Wall Street Physician (01/17/2019), "Should You Invest in the S&P 500 or the Total Stock Market?".

If you want to add some MidCap S&P 400 Index Separate Account ER 0.05% and SmallCap S&P 600 Index Separate Account ER 0.05%, then an 83/11/06 mix of 500/400/600 will mimic the content of a total stock market index fund. Wiki article, "Approximating total stock market". In my opinion this is not necessary, it is optional if you prefer to do this.




International stocks.
For international stocks American Funds EuroPacific Growth R6 (RERGX) ER 0.49 although actively managed is a good, well diversified international stock fund investing in both developed and emerging markets, with a moderate expense ratio. In the absence of a good international stock index fund, I suggest using this fund in your 401k.



Bonds.
If you want something in addition to treasuries for your bond allocation, then I suggest PIMCO Total Return Instl Fund (PTTRX) ER 0.55%, rather than junk bonds. In my opinion PIMCO Total Return Institutional Class (PTTRX) offered in your 401k is a good choice for a bond fund. Although actively managed it is a well diversified intermediate-term bond fund with a moderate expense ratio, and compares well to a total bond market index fund.

Please see nisiprius post in forum discussion "Bond Fund for Three-Fund Portfolio", Total Bond Market vs PTTRX? “"As for PIMCO Total Return versus Vanguard Total Bond, that's a tough one. They act generally the same, they both show the steady upward lift on a growth chart that comes from reinvested dividends, there are no funny places where one does something wildly different than the other, and the size of the fluctuations in PIMCO Total Return are not visible larger than in Vanguard Total Bond. In the chart above, both funds go up and down together, but PIMCO just keeps steadily widening the lead. PIMCO Total Return definitely made more money."

Morningstar, “Growth of 10k”, "PTTRX vs VBTLX".
Last edited by ruralavalon on Tue Aug 13, 2019 12:28 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Dottie57
Posts: 6550
Joined: Thu May 19, 2016 5:43 pm

Re: First real job 401k. Please help dissect my options :)

Post by Dottie57 » Tue Aug 13, 2019 12:07 pm

HawkeyePierce wrote:
Tue Aug 13, 2019 6:41 am
Personally I’d skip the high yield bonds and just use the intermediate treasury fund for your bond allocation.

Junk bonds don’t provide the ballast your looking for in a bond allocation, treasuries do.
This.

Topic Author
radzoo
Posts: 5
Joined: Mon Aug 12, 2019 10:05 pm

Re: First real job 401k. Please help dissect my options :)

Post by radzoo » Tue Aug 13, 2019 5:38 pm

HawkeyePierce wrote:
Tue Aug 13, 2019 6:41 am
Personally I’d skip the high yield bonds and just use the intermediate treasury fund for your bond allocation.

Junk bonds don’t provide the ballast your looking for in a bond allocation, treasuries do.
Great point. I didn't realize that. Thanks!

lakpr
Posts: 2100
Joined: Fri Mar 18, 2011 9:59 am

Re: First real job 401k. Please help dissect my options :)

Post by lakpr » Tue Aug 13, 2019 5:56 pm

You have been given great advice already above. I just wanted to add a note about the reasonableness of the plan fees. My MegaCorp, with 63 thousand people employed across three continents, provides a 401k plan with $60 per year per participant fees, levied $15 quarterly. The distribution fee, wire transfer fee, loan set up fee etc are identical to what you listed as well.

$60 fee per year, on a $19k contribution per year (you should max out given the great options in your plan), comes to about 0.03% additional expense ratio. Quite tiny as to be almost irrelevant.

Topic Author
radzoo
Posts: 5
Joined: Mon Aug 12, 2019 10:05 pm

Re: First real job 401k. Please help dissect my options :)

Post by radzoo » Tue Aug 13, 2019 6:27 pm

Thanks so much for taking the time to write out such a thoughtful and detailed response. Very much appreciated!
ruralavalon wrote:
Tue Aug 13, 2019 11:49 am

....
Contribute enough to your 401k to get the full employer match every year. If you can afford to contribute more to investing, then (if eligible) open an IRA at a low cost provider like Vanguard or Fidelity and contribute up to $6k annually.
....
There are income limits for eligibility to contribute to IRAs. What is your tax filing status? What is your annual income? Your modified AGI if you know that?
....
Excellent point on the IRA. I recently learned about this and started a Backdoor Roth and was able to fill it for 2018 and 2019 before the deadline due to some unexpected funds.

To answer your question, modified AGI will be outside limits limits for any contribution deduction.

Tax status is married filing separately.

I also greatly appreciate your point about American Funds EuroPacific Growth R6 as an international option despite the expense ratio. I had not considered that and on second look it does look like a reasonable option.

A possible strategy would be to skip international in my 401k. I would plan to fill it to limit and then I could then add a vanguard international index in a taxable account. Would your recommendation on international exposure in a 401 k change based on that?

Topic Author
radzoo
Posts: 5
Joined: Mon Aug 12, 2019 10:05 pm

Re: First real job 401k. Please help dissect my options :)

Post by radzoo » Tue Aug 13, 2019 6:28 pm

lakpr wrote:
Tue Aug 13, 2019 5:56 pm
You have been given great advice already above. I just wanted to add a note about the reasonableness of the plan fees. My MegaCorp, with 63 thousand people employed across three continents, provides a 401k plan with $60 per year per participant fees, levied $15 quarterly. The distribution fee, wire transfer fee, loan set up fee etc are identical to what you listed as well.

$60 fee per year, on a $19k contribution per year (you should max out given the great options in your plan), comes to about 0.03% additional expense ratio. Quite tiny as to be almost irrelevant.
When stated like that you are absolutely correct. I just had no frame of reference regarding fees and feel fortunate to be in this situation.

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ruralavalon
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Location: Illinois

Re: First real job 401k. Please help dissect my options :)

Post by ruralavalon » Tue Aug 13, 2019 6:39 pm

radzoo wrote:
Tue Aug 13, 2019 6:27 pm
Thanks so much for taking the time to write out such a thoughtful and detailed response. Very much appreciated!
ruralavalon wrote:
Tue Aug 13, 2019 11:49 am

....
Contribute enough to your 401k to get the full employer match every year. If you can afford to contribute more to investing, then (if eligible) open an IRA at a low cost provider like Vanguard or Fidelity and contribute up to $6k annually.
....
There are income limits for eligibility to contribute to IRAs. What is your tax filing status? What is your annual income? Your modified AGI if you know that?
....
Excellent point on the IRA. I recently learned about this and started a Backdoor Roth and was able to fill it for 2018 and 2019 before the deadline due to some unexpected funds.

To answer your question, modified AGI will be outside limits limits for any contribution deduction.

Tax status is married filing separately.

I also greatly appreciate your point about American Funds EuroPacific Growth R6 as an international option despite the expense ratio. I had not considered that and on second look it does look like a reasonable option.

A possible strategy would be to skip international in my 401k. I would plan to fill it to limit and then I could then add a vanguard international index in a taxable account. Would your recommendation on international exposure in a 401 k change based on that?
It's good to see that you are contributing to the backdoor Roth IRA.

Are you also making the maximum annual employee contribution of $19k to your 401k? That would be a priority ahead of contributions to a taxable account.

In general I prefer a good index fund over a good actively managed fund.

I endorse the idea of using a very diversified fund like Vanguard Total International Stock Index Fund (VTIAX) ER 0.11% in an account at Vanguard for the international stock allocation, instead of the actively managed fund in your 401k.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
radzoo
Posts: 5
Joined: Mon Aug 12, 2019 10:05 pm

Re: First real job 401k. Please help dissect my options :)

Post by radzoo » Tue Aug 13, 2019 7:38 pm

ruralavalon wrote:
Tue Aug 13, 2019 6:39 pm

It's good to see that you are contributing to the backdoor Roth IRA.

Are you also making the maximum annual employee contribution of $19k to your 401k? That would be a priority ahead of contributions to a taxable account.

In general I prefer a good index fund over a good actively managed fund.

I endorse the idea of using a very diversified fund like Vanguard Total International Stock Index Fund (VTIAX) ER 0.11% in an account at Vanguard for the international stock allocation, instead of the actively managed fund in your 401k.
Currently I am deferring as much as I can afford in my 403b but nowhere near the max since I'm completing my studies and have a pretty limited income with competing financial needs (student loans mostly). It's currently in a target retirement fund so nothing sophisticated and reading the forums has inspired me to learn more and have an allocation that matches my risk tolerance. I was planning on taking my 403b contributions and converting them to a Roth since I will be a few tax brackets above my current income moving forward. Any resources on how to do this?

User avatar
ruralavalon
Posts: 16139
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: First real job 401k. Please help dissect my options :)

Post by ruralavalon » Tue Aug 13, 2019 8:06 pm

:x
radzoo wrote:
Tue Aug 13, 2019 7:38 pm
ruralavalon wrote:
Tue Aug 13, 2019 6:39 pm

It's good to see that you are contributing to the backdoor Roth IRA.

Are you also making the maximum annual employee contribution of $19k to your 401k? That would be a priority ahead of contributions to a taxable account.

In general I prefer a good index fund over a good actively managed fund.

I endorse the idea of using a very diversified fund like Vanguard Total International Stock Index Fund (VTIAX) ER 0.11% in an account at Vanguard for the international stock allocation, instead of the actively managed fund in your 401k.
Currently I am deferring as much as I can afford in my 403b but nowhere near the max since I'm completing my studies and have a pretty limited income with competing financial needs (student loans mostly). It's currently in a target retirement fund so nothing sophisticated and reading the forums has inspired me to learn more and have an allocation that matches my risk tolerance. I was planning on taking my 403b contributions and converting them to a Roth since I will be a few tax brackets above my current income moving forward. Any resources on how to do this?
What is your current tax bracket, both federal and state?

Is your employer's plan a 401k or a 403b?

Does your employer also offer a 457b plan?

Does your employer's plan permit Roth contributions?

Does your employer's plan permit in-plan Roth conversions?

Does your employer's plan permit non-Roth after-tax contributions?

Does your employer's plan permit non-Roth after-tax contributions to be distributed while you are still working there (“in-service distribution”)?

Does your employer's plan permit if the plan also offers a Roth 401k option, whetheit does, whether such contributions can be distributed while you are still working there (“in-service distribution”)?

Does your employer's plan permit the non-Roth after-tax contributions contributions to be rolled over to the Roth 401k part of the plan (“in-plan Roth rollover”)?

TFB blog post, "The Elusive Mega Backdoor Roth".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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