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Bad bond fund in 401k?

Posted: Fri May 22, 2020 3:47 pm
by lazaro53
English is not my first language
we are late investing, came from Cuba some years ago with nothing, income is more than 400.000 now. Coming from socialism we did not know anything about investing or that we should invest, still afraid. 46 and husband 55
Husband has a 401k, started 6 years ago, 250000 in 2030 target date fund. The rest of our money is in normal saving and also we have paid a lot toward mortgage.

We now opened 2 IRAs (backdoor) and a vanguard brokerage account, from now on we want to Not use target date fund in 401k, and treat the 3 accounts like one. 30 or 35 % bonds and rest in equity, 2 funds portfolio. We want to invest as much as we can every month.
I would like to know if we should put our fixed income in 401k? or buy vanguard total bond in taxable account??

The problem is: This is the only bond fund in 401.
Principal Global Investors Core Fixed Income Separate Account, 0.31 %
The rest of the funds are mutual funds, target date funds, and only 3 index (large cap S&P 500, mid cap 400, small cap 600/ 0.05 each)

Should we put fixed income in the Principal fund? Is this a good fund? Is it too expensive? Or put bonds in vanguard total bond and stocks in 401k and brokerage?

Any other advice? My husband does not think of retirement maybe until 75 if possible, loves his profession, maybe we have more time until money needed.

Thank You. Sorry for the English. I hope you understand me.

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 4:05 pm
by vineviz
lazaro53 wrote:
Fri May 22, 2020 3:47 pm
The problem is: This is the only bond fund in 401.
Principal Global Investors Core Fixed Income Separate Account, 0.31 %
The rest of the funds are mutual funds, target date funds, and only 3 index (large cap S&P 500, mid cap 400, small cap 600/ 0.05 each)

Should we put fixed income in the Principal fund? Is this a good fund? Is it too expensive? Or put bonds in vanguard total bond and stocks in 401k and brokerage?
Welcome to the forum.

Given the poor choices in the 401k (expensive bond fund, it seems like no international index funds), my main advice is to KEEP the 401k invested in a target date fund. Either 2030 or 2040 would be fine, if your husband is truly planning to work for 20 more years.

I think the advantages of splitting up the target date fund are greatly overstated for most investors. Why complicate your life for what, in reality, will turn out to be virtually no significant advantage (or, worse, no advantage at all)?

From an older thread on the topic:
Rick Ferri wrote:
Wed Jun 27, 2012 3:31 pm
Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.
viewtopic.php?f=1&t=98662

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 4:08 pm
by lazaro53
Thank you, target date is 0.27. I dont know other fees but I think there are more fees

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 4:21 pm
by vineviz
lazaro53 wrote:
Fri May 22, 2020 4:08 pm
Thank you, target date is 0.27. I dont know other fees but I think there are more fees
Oh, yuck. I guess I'm guilty of assuming the target date fund was a low-cost Vanguard fund.

Given that, I'd probably invest the 401k in 60% S&P 500 and 40% in the Principal Global Investors fund and then use a cheaper balanced fund Vanguard Target Retirement 2030 Fund (VTHRX) in the other accounts.

As those accounts grow in size and the target date fund glides down to more bonds and less stocks (say, in five years or so) you could take another look at the 401k and maybe shift it to 70% S&P 500 and 30% bonds to lower your costs.

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 5:14 pm
by lazaro53
Thank You!!

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 5:46 pm
by fundseeker
That's an impressive income. Well done!

My employer only offers Principal, which I really don't like. But, our plan does offer this bond fund, which may be a better option if your plan offers it.

Principal Bond Market Index Separate Account

Just suggesting that you look hard to make sure they don't offer more than one bond fund. Good luck.

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 6:06 pm
by lakpr
If you still have any mortgage amount left, I would suggest you forego the bond fund completely whether in taxable or 401k, and think about paying the mortgage down. A mortgage is a negative bond. And likely to be carrying higher rate than whatever bond fund you are interested in might be yielding.

So paying down your mortgage is the same as paying into a bond fund, risk wise. But returns wise paying down the mortgage is a GUARANTEED return of whatever your mortgage rate is.

If your mortgage principal balance is anything less than $400k, then it's also very likely that you are choosing Standard Deduction instead of itemizing, which makes the option of paying down your mortgage even more compelling.

This is just kicking the time where you should make the choice of whether to invest in a bond fund, down the road, to be frank. But at least you don't have to commit yourself to a 0.31% bond fund right now.

=============
As an aside -- a 0.31% fee on a bond fund is not bad. Not ideal as in less-than 0.1% ER, but not too bad either. My own plan has a Metropolitan West Total Return bond fund at 0.38% ER. Higher than yours. Fortunately I have access to Vanguard Total Bond Index fund (VBTIX) in my previous employer 401k plan, so I buy bonds there and invest completely into equities in my current 401k plan.

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 8:52 pm
by lazaro53
That's an impressive income. Well done!

My employer only offers Principal, which I really don't like. But, our plan does offer this bond fund, which may be a better option if your plan offers it.

Principal Bond Market Index Separate Account

Just suggesting that you look hard to make sure they don't offer more than one bond fund. Good luck.
[They only offer the bond index inside the target date funds, I could ask, thanks ]

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 8:54 pm
by lazaro53
Thank You, I like this idea

Re: Bad bond fund in 401k?

Posted: Fri May 22, 2020 9:26 pm
by dukeblue219
0.27% isn't exactly a terrible expense ratio for a target date fund in a 401k.