401K help and transition plan

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Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

401K help and transition plan

Post by Jvasqu01 » Wed Nov 13, 2019 5:32 pm

Hi,

I've been investing into my corporate 401K since I started working there 22 years ago. I had been just choosing from the handful of options in my 401K really by just splitting the money across the different options. After reading through the site, listening to the videos and reading some books I would like to use more thought into my allocations. Here are my options and allocations right now.

I'm 40 now but I think I have a high risk tolerance. I've read a broad recommendation is to have bond allocations equaling your age. As you can see I'm way under that. I only have the one Bond option. No international bond option.

Stable Value (Cash) 13%

Intermediate Bond (benchmark - BBgBarc US Agg Bond TR USD), 4%

Large Cap Equity, 33%

Mid/Small Cap Equity, 19%

International Equity, 19%

Corporate Stock, 12%

I have a couple of questions. First, if these are my options, I'm thinking of going to 30% on the Bond option. What about the other 70%? Should I move my cash value into equities, and within the equity options what would be the recommended split?

I'm assuming that moving the money out of my corporately managed account into something external would open up options but not sure that would be wise as I have low costs with my plan.

Thanks in advance,
Jvasqu01

lakpr
Posts: 3080
Joined: Fri Mar 18, 2011 9:59 am

Re: 401K help and transition plan

Post by lakpr » Wed Nov 13, 2019 6:34 pm

You haven't mentioned the expense ratios of the options in your plan, but I will take your assertion that the costs are indeed low, at face value.

I would just swap Corporate Stock into Intermediate Bond fund.
Then your total "Fixed Income" allocation = stable value fund + intermediate term bond fund = 13% + 4% + 12% from corp stock = 29%.
Close enough for the desired 30% bond allocation.

It also gets rid of the Corporate Stock in your 401k fund, you don't want to have heavy exposure to a single stock ("concentration risk").

Your Large Cap to Small/Mid Cap is in the ratio of 2:1, it's slightly tilted towards small and mid-cap than the market weight, but it's still a reasonable allocation. The usual ratio of Large Cap to Small + Mid Cap is 4:1 if you take it by market weight (and replicating the total stock market), so you could also try something like 42% Large Cap, 10% Small + Mid cap and 19% International.

Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Thu Nov 14, 2019 9:30 am

Thank you for your reply.

Here are the total operating fees:
Fixed Interests: 0.21%
Intermediate Bond: 0.17%
Diversified Equity - 0.33%
Russell 3000 - 0.06%
Small Cap 0.61%
International Equity - 0.47%

My other question, at 40 years old should I be using Fixed Interest or move that also to Bonds?

Thanks

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

Re: 401K help and transition plan

Post by lakpr » Thu Nov 14, 2019 9:42 am

These aren't low fees, but not so egregious to prevent you from contributing to the 401k account at all. I'd say they are middle of the road.

Can you post other available choices within your 401k? At least, sort everything in each asset class by expense ratio, and list the top 5 entries?
Reason I ask is that, I am surprised to see the Russell 3000 index (which is almost the Total Stock Market Index) at an excellent ER 0.06%, but every other option you listed is at least 4 to 10 times higher. Are you sure there's not a better intermediate bond or fixed income or international equity option with lower expenses than what you listed?

Given this new information, I would go even simpler ... skip the Small Cap altogether. The Small Cap is included in the Russell 3000 according to the market cap. The new portfolio would be:

55% Russell 3000
15% International Equity ( But investigate if there's a lower ER option, 0.47% is high, I'd like to see 0.15% or thereabouts)
30% Intermediate Bond (0.17% is ok, but if there's a lower ER option consider it; of course, I am assuming you will roll the Corporate Stock here)

What is the Fixed Interest fund paying / paid out over the last 1 year? If it is 1.5% or lower, definitely skip it and roll that over to intermediate bond. If it is 1.5% to 2%, toss up -- my recommendation is still to skip it and roll that over. If it paid 2% or higher, that's golden, keep it { in which case your allocation would be 15% Fixed Interest and 15% Intermediate Bond }

I go by the "Age-10" to "Age-15" rule, so for a person in mid forties, a 30% allocation to bonds is right on the target. Age in bonds is way too conservative, especially over a 15 to 20 year horizon. You will be giving up returns.

International bonds are not needed in your portfolio because they are dominated by European bonds, and as you know they are having negative interest rates over there. Yields are not that good. Plus, the yields are dollar hedged/ dollar denominated anyway, so I don't see a currency diversification benefit either. They can be safely skipped with no impact on your portfolio.

Topic Author
Jvasqu01
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Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Thu Nov 14, 2019 10:29 am

I am diversified into every possible option in my 401K so what I posted is all I have options for.

I checked the Fixed Interest and it's yielding 1.22% this year, 2.4% over a year and 3 year it was at 2.05%.

So my next question would be am I better off investing the extra money I send over the company match and set up my own IRA?

I get matched to 6% of salary but I send 10%. If I can do better elsewhere should I move that 4% to an outside broker?

Thanks

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

Re: 401K help and transition plan

Post by lakpr » Thu Nov 14, 2019 12:37 pm

Based on the information you have given me, it does not sound like it would pay to be in the Stable Value (Fixed Interest) fund. That money can be put to better use in the intermediate term bond fund.

To your other question, no it does not make sense for you to skip contributing to your 401k. Actually I would suggest the opposite, max out the 401k plan to the limit, and ALSO contribute to a Roth IRA to the max. That's about $25k per year ($19k + $6k). 30% of this is $7.5k, which is your desired bond allocation.

So I'd contribute it this way:
- $7.5 k per year to the Intermediate Term bond fund
- $11.5k per year to the Russell 3000 fund
- $6k in the Roth IRA into international equity fund at the provider of your choice (Vanguard / Fidelity / Schwab).

The international equity fund is the only one whose expense ratio sticks in my craw, so I suggest you invest it outside of 401k project in the Roth IRA. The expense ratios for the other two funds I am recommending you invest, range from EXCELLENT (Russell 3000) to GOOD (IntTerm bond fund)

If the entire $6k allocation to Roth IRA is a bit too high than your intended allocation to international equities, you may choose a Total Stock Market index also within the Roth IRA.

Edited to add: if you are not able to defer the full $25k per year, then divvy the amount accordingly.
Say you are able to defer only $20k per year. $20k/$25k = 0.8
So defer $7.5k * 0.8 = $6k to the intermediate term bond fund
defer $11.5k * 0.8 = $9.2k to the Russell 3000 fund
contribute $6k * 0.8 = $4.2k to the Roth IRA outside of your work plan.

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ruralavalon
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Location: Illinois

Re: 401K help and transition plan

Post by ruralavalon » Thu Nov 14, 2019 4:17 pm

Welcome to the forum :) .

Here is a wiki article you could read to start educating yourself: "Bogleheads® investment philosophy. For a quick overview of investing basics for the new person read Dr. Bernstein's short book, "If You Can".


Jvasqu01 wrote:
Thu Nov 14, 2019 10:29 am
I am diversified into every possible option in my 401K so what I posted is all I have options for.

I checked the Fixed Interest and it's yielding 1.22% this year, 2.4% over a year and 3 year it was at 2.05%.

So my next question would be am I better off investing the extra money I send over the company match and set up my own IRA?

I get matched to 6% of salary but I send 10%. If I can do better elsewhere should I move that 4% to an outside broker?

Thanks

Jvasqu01 wrote:
Thu Nov 14, 2019 9:30 am
Thank you for your reply.

Here are the total operating fees:
Fixed Interests: 0.21%
Intermediate Bond: 0.17%
Diversified Equity - 0.33%
Russell 3000 - 0.06%
Small Cap 0.61%
International Equity - 0.47%

My other question, at 40 years old should I be using Fixed Interest or move that also to Bonds?

Thanks
I would suggest using the "Intermediate Bond: 0.17%" , rather than the fixed interest option at just 2.4%

For domestic stocks just use "Russell 3000 - 0.06%" . That is a total stock market fund, with a very low expense ratio. It is all you need for domestic stocks.

What is the benchmark for "International Equity - 0.47%"? Does it cover both developed and emerging markets?

I suggest maximum annual contributions to your 401k ($19k), and also maximum annual contributions to a Roth IRA ($6k) at a low cost provider like Vanguard or Fidelity.

Here is a general account funding priority that usually works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Fri Nov 15, 2019 11:58 am

lakpr wrote:
Thu Nov 14, 2019 12:37 pm

To your other question, no it does not make sense for you to skip contributing to your 401k. Actually I would suggest the opposite, max out the 401k plan to the limit, and ALSO contribute to a Roth IRA to the max. That's about $25k per year ($19k + $6k). 30% of this is $7.5k, which is your desired bond allocation.
Thank you for your input lakpr! I am not elligible for a Roth but I certainly think the other recommendations are doable right away.
Last edited by Jvasqu01 on Fri Nov 15, 2019 5:29 pm, edited 1 time in total.

lakpr
Posts: 3080
Joined: Fri Mar 18, 2011 9:59 am

Re: 401K help and transition plan

Post by lakpr » Fri Nov 15, 2019 12:06 pm

Jvasqu01 wrote:
Fri Nov 15, 2019 11:58 am
lakpr wrote:
Thu Nov 14, 2019 12:37 pm

To your other question, no it does not make sense for you to skip contributing to your 401k. Actually I would suggest the opposite, max out the 401k plan to the limit, and ALSO contribute to a Roth IRA to the max. That's about $25k per year ($19k + $6k). 30% of this is $7.5k, which is your desired bond allocation.
Thank you for your input lakpr! I am not elligible for a Roth but I certainly think the other recommendations are doable right away.
When you say you are not eligible for Roth, I assume your income is too high to make a direct Roth contribution? That's exactly why both @ruralavalon and I are suggesting the Backdoor Roth process.

Step 1: Make sure you have $0 in any traditional IRA or Rollover IRA or SEP-IRA (really any IRA that's not prefixed by Roth)
Most 401k plans accept rollovers of the funds from these accounts into the plan. Your plan has EXCELLENT to GOOD choices, so no reason not to take this step
Step 2: Once Step-1 is completed, then contribute $6000 to a traditional IRA again. Remember that this is NON-DEDUCTIBLE. Wait 2 days for the funds to settle
Step 3: Convert the traditional IRA from Step-2 to Roth. You will pay tax only on the growth that occurred between Step-2 and Step-3.
Step 4: *** Make sure you do not add or rollover any money to traditional IRA again, until next year!! The Dec-31 balance in tIRA/rolloverIRA/ etc must be $0!!! ****

Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Fri Nov 15, 2019 1:58 pm

ruralavalon wrote:
Thu Nov 14, 2019 4:17 pm
Welcome to the forum :) .
Thank you! It's been great! :happy
--------------------
ruralavalon wrote:
Thu Nov 14, 2019 4:17 pm

What is the benchmark for "International Equity - 0.47%"? Does it cover both developed and emerging markets?
Benchmark is MSCI ACWI Ex USA NR
ruralavalon wrote:
Thu Nov 14, 2019 4:17 pm

2) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".
I will do some more research on the backdoor Roth technique as I'm not Roth eligible. I have some more reading to do but I'm getting some great inputs!

Thanks!

User avatar
ruralavalon
Posts: 16716
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 401K help and transition plan

Post by ruralavalon » Fri Nov 15, 2019 2:03 pm

Jvasqu01 wrote:
Fri Nov 15, 2019 1:58 pm

ruralavalon wrote:
Thu Nov 14, 2019 4:17 pm

What is the benchmark for "International Equity - 0.47%"? Does it cover both developed and emerging markets?
Benchmark is MSCI ACWI Ex USA NR
That suggests that the fund includes both developed and emerging markets.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Fri Nov 15, 2019 5:28 pm

lakpr wrote:
Thu Nov 14, 2019 12:37 pm

When you say you are not eligible for Roth, I assume your income is too high to make a direct Roth contribution? That's exactly why both @ruralavalon and I are suggesting the Backdoor Roth process.

Step 1: Make sure you have $0 in any traditional IRA or Rollover IRA or SEP-IRA (really any IRA that's not prefixed by Roth)
Most 401k plans accept rollovers of the funds from these accounts into the plan. Your plan has EXCELLENT to GOOD choices, so no reason not to take this step
Step 2: Once Step-1 is completed, then contribute $6000 to a traditional IRA again. Remember that this is NON-DEDUCTIBLE. Wait 2 days for the funds to settle
Step 3: Convert the traditional IRA from Step-2 to Roth. You will pay tax only on the growth that occurred between Step-2 and Step-3.
Step 4: *** Make sure you do not add or rollover any money to traditional IRA again, until next year!! The Dec-31 balance in tIRA/rolloverIRA/ etc must be $0!!! ****
Yes my income is to high but I didn't even know about this back-door option.

I've gone ahead and created a new investment mix in my corporate 401K to the 55% US Equity, 30% Fund and 15% International Equity suggestions.

I'm going to go ahead and research lower fee options for the international equity offering and I'll do the backdoor Roth option and reduce my contribution from my corporate account and re-direct it elsewhere.

Thanks!

Topic Author
Jvasqu01
Posts: 7
Joined: Fri Sep 20, 2019 5:20 pm

Re: 401K help and transition plan

Post by Jvasqu01 » Fri Nov 15, 2019 5:29 pm

ruralavalon wrote:
Thu Nov 14, 2019 4:17 pm

Benchmark is MSCI ACWI Ex USA NR
That suggests that the fund includes both developed and emerging markets.
Affirmative

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