Auto-invest mutual fund w/ fee or manual ETF?

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jco
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Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

I am converging toward the three-fund portfolio (thank you Taylor et al. for your books!) and trying to determine the most sensible approach for doing that moving forward.

I have an employer-sponsored, tax-protected retirement account through TIAA. Through TIAA, all of the good index mutual funds have a $35 transaction fee (Vanguard, Schwab, Fidelity, BlackRock, etc.) for any buy or sell, with the exception that automated purchases are free. ETF transactions are free. I'm trying to decide whether I should auto-invest into mutual funds or manually purchase ETFs. I'll just do two-fund examples below.

e.g., let's say I put 80% of my money into VTSAX and 20% in VTIAX. I'd get hit with $70 worth of fees for the initial purchase. I can auto-invest monthly for free into these funds. But anytime I decide to rebalance by selling some VTSAX and buying additional VTIAX (or vice versa) it would be another $70. That feels like a lot of expenses just to rebalance. (And the cost increases for each additional fund). Alternatively, I could put 80% of my money into VTI and 20% into VT (with a little leftover since you can't buy fractional ETFs through TIAA). Each month I could do the same thing, but I'd have to go in manually and do it since ETF purchases are not automated.

I'm considering several options (and any more that you recommend):
1. Buy into the desired mutual funds, auto-invest each month, rebalance when necessary, pay my transaction fees with a grimace.
2. Move all into ETFs, try to remember to reinvest monthly. More work but no fees! (I've read a bit about bid/ask prices with ETFs, but that doesn't sound like it will matter if you intend buy and hold indefinitely).
3. Buy the minimum amount of admiral share mutual funds. Split the rest into the desired ETFs. Auto-invest into the mutual funds each month. Rebalance using the ETFs as needed. This has an initial hit, but would be easier to automate moving forward.

What would you recommend?
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anon_investor
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by anon_investor »

Do they not have any no transaction fee mutual fund options? I know TIAA has some of their own index funds, which depending on your plan may be low cost, and are perfect acceptable to implement a 3 fund portfolio.
stan1
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by stan1 »

Adjust which funds the auto invest money goes into so you are putting your new money into the funds you want it in. You do not need your asset allocation to be exact. If you want 70/30 stocks/bonds maybe you don't adjust anything until it is 75/25, then you only buy bonds for awhile. Detailed precision is not required!
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jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

anon_investor wrote: Thu Jan 30, 2020 11:12 am Do they not have any no transaction fee mutual fund options? I know TIAA has some of their own index funds, which depending on your plan may be low cost, and are perfect acceptable to implement a 3 fund portfolio.
Ironically, the index funds they have (e.g., TIAA-CREF S&P 500 Index Fund (Institutional), TISPX) are not NTF.

They do have some T. Rowe Price ones available (e.g., T. Rowe Price Equity Index 500 Fund, PREIX) that are NTF but they have a much higher expense ratio (0.20%).
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anon_investor
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by anon_investor »

Wow just wow. Just get ETFs then and see how it works out for you. I personally prefer mutual funds over ETFs due to the convenience when purchasing, but the cost to me is only 1 basis point extra (e.g. VTSAX = 0.04% ER vs. VTI = 0.03% ER). But since you will be making purchase per pay check, $35 per transaction would really start adding up.
ohai
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by ohai »

Can you buy any ETFs, or just a handful that are approved by your plan?
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Wiggums
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by Wiggums »

I would try my best to avoid the transaction fee. That cost will add up quickly.
NYCPete
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by NYCPete »

jco wrote: Thu Jan 30, 2020 2:03 pm
anon_investor wrote: Thu Jan 30, 2020 11:12 am Do they not have any no transaction fee mutual fund options? I know TIAA has some of their own index funds, which depending on your plan may be low cost, and are perfect acceptable to implement a 3 fund portfolio.
Ironically, the index funds they have (e.g., TIAA-CREF S&P 500 Index Fund (Institutional), TISPX) are not NTF.

They do have some T. Rowe Price ones available (e.g., T. Rowe Price Equity Index 500 Fund, PREIX) that are NTF but they have a much higher expense ratio (0.20%).
This kind of confuses me. There should be a number of options in your retirement plan that are offered as part of some regular menu. It sounds like your plan apparently also offers the option of using brokerage access outside of your usual plan options so you can basically pick from anywhere in the investment universe. If this assumption is correct, than of course there will be cheaper index funds that have much lower expense ratios than in your plan. But...for the privilege of using investments that weren't offered in your normal plan, you have to pay for it. TIAA runs your plan, but your company decides what investments are offered in the standard menu. If a TIAA index fund isn't offered in that standard menu, than you have to pay transaction fees to invest in it, just like if you go outside your standard menu to Vanguard, Fidelity, etc.

Setting aside the ETF option: Let's say you do auto-invest and get a bunch of money in one of those funds that has transaction fees. At the end of the day, there's still no way to re-balance or get money back out of that fund without paying a transaction fee. Don't be fooled by the lower expense ratio of choices outside of your plan. You're still going to pay, they're just moving some of the cost to a transaction fee. If you rebalance often, you may even end up worse than if you'd just gone with a no fee option offered in the plan.

I would do anything to have an index fund in my 401k as cheap as the T. Rowe Price Equity Index 500. 0.20% is still decent for a employer retirement plan, and it seems a lot simpler than having to manage manual ETF purchases, or constant switching of auto-invest to keep your asset allocation in line.

You might get additional or better insights if you list all the menu options your plan offers that don't require a transaction fee.

Best,
Peter
To the extent that a fool knows his foolishness, | He may be deemed wise | A fool who considers himself wise | Is indeed a fool. | | Buddha
SpaceMonkey
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by SpaceMonkey »

It would definitely be helpful to get the full picture of available funds in your plan.

In addition to possibly overvaluing the difference in expense ratio between "good" funds like VTSAX and other non-fee funds that may be perfectly acceptable, you also may be overestimating the number of times that you would need to rebalance. Using a rebalancing band method, many people find that their portfolio does not drift substantially from their target AA for years.
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jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

NYCPete wrote: Thu Jan 30, 2020 2:44 pm You might get additional or better insights if you list all the menu options your plan offers that don't require a transaction fee.
SpaceMonkey wrote: Thu Jan 30, 2020 3:09 pm It would definitely be helpful to get the full picture of available funds in your plan.
I apologize for not being specific enough. Your suspicions are correct: there is a "basic menu" of fund choices and a brokerage side. Most of my money is in the brokerage side for historical reasons (though I can pull that back to the main menu if desired).

The main menu side does have some decent index funds through BlackRock (though they jacked up most of the expense ratios by a factor of between 4 and 8 right after the new year). The international fund is really good though. The table below provides the "main menu" index funds, the associated ER, along with the most equivalent Vanguard index fund. The Vanguard versions have the "V" prefix.

Code: Select all

Name				Ticker	ER	VTicker	VName			VER
BR Equity Index Fund J		BREJ#	0.08	VFIAX	500 index		0.04
BR Mid Cap Equity Index Fund M	BRC2#	0.07	VSPMX	S&P Mid-Cap 400		0.08
BR Russell 2000 Index M		BRC3#	0.18	VRTIX	Russell 2000 Index I	0.08
BR MSCI ACWI ex-U.S.		BRC0#	0.04	VTIAX	Total International	0.11
BR U.S. Debt Index Fund M	BRC5#	0.08	VBTLX	Total Bond Market	0.05
There are also some Vanguard Target Retirement funds with an ER of 0.07 or so, which holds the standard 4-fund portfolio.

Currently, I'm investing something like 20% into the the total international index fund. The rest is split between the S&P 500 index fund and Russell 2000 index fund to Mimic VTSAX. But it annoys me that the ER are more than the equivalent Vanguard index funds.

I suppose another option is to convert all of my brokerage side into good index fund ETFS (VTI, VIT, etc.) then put new contributions in the "main menu" index funds for simplicity.

Is the verdict that I'm overthinking this? I do that sometimes ...
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goingup
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by goingup »

There's a few problems with manually investing. First, you have to remember to do it. Second, you have to be bold enough to do it without emotion like clockwork. That's just too hard, IMO. The beauty of a 401K is automatic periodic investing.

Also, paying .20 ER for a TIAA index fund isn't especially bad. If your balance is 10K, you'll pay $20 per year. At $100K, it's $200. I'd easily pay that rather than muck around with manually investing in ETFs or paying transaction fees.
Topic Author
jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

anon_investor wrote: Thu Jan 30, 2020 2:10 pm Wow just wow. Just get ETFs then and see how it works out for you. I personally prefer mutual funds over ETFs due to the convenience when purchasing, but the cost to me is only 1 basis point extra (e.g. VTSAX = 0.04% ER vs. VTI = 0.03% ER). But since you will be making purchase per pay check, $35 per transaction would really start adding up.
Just to be clear, I can auto invest for free in any mutual fund that I already have a position in. It's the manual purchases that invoke the fee.
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jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

ohai wrote: Thu Jan 30, 2020 2:14 pm Can you buy any ETFs, or just a handful that are approved by your plan?
I can buy any available ETF without a transaction fee.
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anon_investor
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by anon_investor »

How much does access to the brokerage window cost you? Many plans charge an additional fee for this access.
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jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

anon_investor wrote: Thu Jan 30, 2020 7:16 pm How much does access to the brokerage window cost you? Many plans charge an additional fee for this access.
The brokerage window is free, as far as I know. There is an annual "Plan Servicing Fee" at the end of each year for account maintenance (~$33), but it doesn't seem to be specific to the brokerage window.
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by NYCPete »

jco wrote: Thu Jan 30, 2020 5:23 pm
NYCPete wrote: Thu Jan 30, 2020 2:44 pm You might get additional or better insights if you list all the menu options your plan offers that don't require a transaction fee.
SpaceMonkey wrote: Thu Jan 30, 2020 3:09 pm It would definitely be helpful to get the full picture of available funds in your plan.
I apologize for not being specific enough. Your suspicions are correct: there is a "basic menu" of fund choices and a brokerage side. Most of my money is in the brokerage side for historical reasons (though I can pull that back to the main menu if desired).

The main menu side does have some decent index funds through BlackRock (though they jacked up most of the expense ratios by a factor of between 4 and 8 right after the new year). The international fund is really good though. The table below provides the "main menu" index funds, the associated ER, along with the most equivalent Vanguard index fund. The Vanguard versions have the "V" prefix.

Code: Select all

Name				Ticker	ER	VTicker	VName			VER
BR Equity Index Fund J		BREJ#	0.08	VFIAX	500 index		0.04
BR Mid Cap Equity Index Fund M	BRC2#	0.07	VSPMX	S&P Mid-Cap 400		0.08
BR Russell 2000 Index M		BRC3#	0.18	VRTIX	Russell 2000 Index I	0.08
BR MSCI ACWI ex-U.S.		BRC0#	0.04	VTIAX	Total International	0.11
BR U.S. Debt Index Fund M	BRC5#	0.08	VBTLX	Total Bond Market	0.05
There are also some Vanguard Target Retirement funds with an ER of 0.07 or so, which holds the standard 4-fund portfolio.

Currently, I'm investing something like 20% into the the total international index fund. The rest is split between the S&P 500 index fund and Russell 2000 index fund to Mimic VTSAX. But it annoys me that the ER are more than the equivalent Vanguard index funds.

I suppose another option is to convert all of my brokerage side into good index fund ETFS (VTI, VIT, etc.) then put new contributions in the "main menu" index funds for simplicity.

Is the verdict that I'm overthinking this? I do that sometimes ...
I'm still a little confused. You have access to those Vanguard funds you listed in the standard menu, or you invested in those Vanguard funds through the brokerage link? The fees on those Blackrock funds are extremely competitive for a workplace retirement plan. It's not that you're overthinking it. It's that I'm not sure you realize how extremely nice the standard options are in your plan. Of course one's plan is not going to look as nice if you compare it to every single available option that's out there. That doesn't make your plan options expensive.

For context, here's my only index options in my company's plan:

Principal Bond Index Separate account 0.16% ER
Principal Large Cap Index Separate account 0.05% ER
Principal Int'l Equity Index Separate account 0.26% ER

You might be thinking "hey that large cap index is great!" You'd be right, except that whereas you have a $35 per year account service fee, my plan charges 0.25% for the same thing. So essentially you can add .25% ER to every option in my plan. And I don't have brokeragelink. Your plan provider may be making money and paying for the plan by having slightly higher ERs than the Vanguard fund equivalents thaat retail investors could get. But that doesn't make them bad. The plans have to be paid for somehow, right?

Focusing on cost doesn't just mean focusing on the lowest expense ratio. It means focusing on "costs" which include ERs, service fees, transaction fees, etc. All of it. If you posted saying you had a million dollars in your account, then there's probably a stronger argument that you should pay the $35 to cut an ER by half. Even then, that's only if you'll hold it there long enough to justify paying $70 to get money in and back out when you leave your employer. But I suspect that a $1 million account is not the case.

Seriously, you'll be fine with the standard index options. In the land of employer retirement plans, you have an embarrassment of riches!!

Best,
Peter
To the extent that a fool knows his foolishness, | He may be deemed wise | A fool who considers himself wise | Is indeed a fool. | | Buddha
Topic Author
jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

NYCPete wrote: Fri Jan 31, 2020 11:09 am I'm still a little confused. You have access to those Vanguard funds you listed in the standard menu, or you invested in those Vanguard funds through the brokerage link? The fees on those Blackrock funds are extremely competitive for a workplace retirement plan. It's not that you're overthinking it. It's that I'm not sure you realize how extremely nice the standard options are in your plan. Of course one's plan is not going to look as nice if you compare it to every single available option that's out there. That doesn't make your plan options expensive.
Peter, thanks for your insight into this. I'm sure you're right about taking how good it is for granted. I've been jealous of everyone being able to buy VTSAX, STSSX, etc., without a transaction fee, that I've been ungrateful for the excellent offerings I do have.

To answer your question, the Vanguard funds I mentioned are NOT available in the "main menu" of my plan. The BlackRock funds are technically Collective Investment Trusts (CITs), so information about them is scarce. I provided that Vanguard information for ease of comparison. I DO have access to the Vanguard Target Date funds through the "main menu", but I'm not interested in those quite yet.

Ironically, TIAA has updated the information about the BlackRock index funds and the ERs are much better (overall) than they were the last time I checked. I'm thinking they must have had a bad website update for my plan, because I double-checked numerous times. In fact, the current expense ratios for those funds are:

0.01% BlackRock Equity Index Fund J (BREJ#)
0.03% BlackRock Mid Capitalization Equity Index Fund M (BRC2#)
0.07% BlackRock MSCI ACWI ex-U.S. Index Fund M (BRC0#)
0.03% BlackRock Russell 2000 Index M (BRC3#)
0.03% BlackRock U.S. Debt Index Fund M (BRC5#)

Those are some killer ERs.

I will be sticking to "main menu" index funds moving forward and try to recreate the 3-fund portfolio with these 5 funds. I will probably buy VTI and similar ETFs with the money currently in the brokerage side for convenience. That minimizes transaction fees while retaining flexibility moving forward.

Thanks again for your help!
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anon_investor
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by anon_investor »

CIT index funds are perfectly fine. There is an entry about them in the forum wiki. My mega corp 401k uses State Street administered ones, and I have no issue using them. Black Rock is just as reputable and should be fine.
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jco
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by jco »

anon_investor wrote: Fri Jan 31, 2020 6:28 pm CIT index funds are perfectly fine. There is an entry about them in the forum wiki.
Thanks. Found the wiki here: https://www.bogleheads.org/wiki/Collect ... ent_Trusts
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1789
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Re: Auto-invest mutual fund w/ fee or manual ETF?

Post by 1789 »

I would just buy ETFs manually. I would just do market order and be done with it. This will minimise your time. Sometimes you will probably forget to buy when money hits your account but you can buy next day or so. So I think ETFs are better in this situation.
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