Target fund to 3 fund portfolio

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Topic Author
Sho
Posts: 5
Joined: Wed Nov 24, 2021 9:38 am

Target fund to 3 fund portfolio

Post by Sho »

Hello, my first post here . Please let me know if the question needs to be posted in different section of forum .

Is it worth converting target fund investment to 3 fund portfolio? I have the time and interest in managing my funds.
I am talking about tax deferred accounts

I am not sure it is worth paying 5-6K every year and more as portfolio grows. They always lag behind market as well.

I have to stay with Fidelity and when I looked at options,


I have FJTKX ( target 2045) for 401(a), expense ratio 0.5, amount close to 750K.
It is
US equity: 51.72%
Non US: 41.25%
Bonds: 6.91%
short term debt: 0.12%


For 3 fund,

available best options, I see are

US: FXAIX( Fidelity 500),ER, 0.015%-US Equity
FSPSX( international, from wallstreet physician's website, no exposure to emerging markets and minimal mid to small cap)- International
FXNAX for bonds


403 and 457 has FSNZX, close to 0.65%. amount close to 350K

options

FXAIX( as above), and FSKAX ( total market)- US equity
FSPSX ( as above) or FTIHX( broad exposure) , international
FXNAX for bonds

I plan to keep the allocation close to target funds and look at it once a year. I am 42-44 age group,, but plan to stay aggressive, as hopefully pension will be there

Thank you
dbr
Posts: 37901
Joined: Sun Mar 04, 2007 9:50 am

Re: Target fund to 3 fund portfolio

Post by dbr »

A good target for ERs is less than 0.1%. You should not be invested in a 0.5% ER fund unless absolutely necessary for some reason.

A quick look at the impact of costs might be to see the total achieved at $10,000/year contribution at 6% return and 5.9% and 5.5% for 30 years.

The results are $791k, $777k, and $724k respectively. At 4% when investing with an advisor at 1% AUM and funds costing 1% the end result is $561k.
ClaycordJCA
Posts: 392
Joined: Sun Aug 09, 2015 11:19 pm
Location: SF Bay Area

Re: Target fund to 3 fund portfolio

Post by ClaycordJCA »

Your current target date fund is actively managed, which explains the high expense ratio. If you prefer a one fund solution, if it is available in your 401k plan consider instead the Fidelity Freedom Index target date funds, which are not actively managed. The expense ratio for the investor class index funds is .12. The ticker for the 2045 Freedom Index fund is FIOFX.
Mike Scott
Posts: 2084
Joined: Fri Jul 19, 2013 2:45 pm

Re: Target fund to 3 fund portfolio

Post by Mike Scott »

I think you are on the right track given the choices you list. Also as mentioned, check to see if the Freedom Index funds are available and cheaper.

I would let it sit for a while to discuss and digest and not make any sudden changes. Be sure you understand any complications before making changes.
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ruralavalon
Posts: 22667
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Target fund to 3 fund portfolio

Post by ruralavalon »

Welcome to the forum :) .

Sho wrote: Wed Nov 24, 2021 9:42 am Hello, my first post here . Please let me know if the question needs to be posted in different section of forum .

Is it worth converting target fund investment to 3 fund portfolio? I have the time and interest in managing my funds.
I am talking about tax deferred accounts

I am not sure it is worth paying 5-6K every year and more as portfolio grows. They always lag behind market as well.

I have to stay with Fidelity and when I looked at options,


I have FJTKX ( target 2045) for 401(a), expense ratio 0.5, amount close to 750K.
It is
US equity: 51.72%
Non US: 41.25%
Bonds: 6.91%
short term debt: 0.12%


For 3 fund,

available best options, I see are

US: FXAIX( Fidelity 500),ER, 0.015%-US Equity
FSPSX( international, from wallstreet physician's website, no exposure to emerging markets and minimal mid to small cap)- International
FXNAX for bonds


403 and 457 has FSNZX, close to 0.65%. amount close to 350K

options

FXAIX( as above), and FSKAX ( total market)- US equity
FSPSX ( as above) or FTIHX( broad exposure) , international
FXNAX for bonds

I plan to keep the allocation close to target funds and look at it once a year. I am 42-44 age group,, but plan to stay aggressive, as hopefully pension will be there

Thank you
The individual index funds offered are excellent funds. What expense ratios are charged in your employer's plans for those funds?

Even though you "plan to keep the allocation close to target funds" the higher expense ratios of the target date funds (0.50% and 0.65%) indicate it will be worthwhile long-term to use the individual index funds with their lower expense ratios.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
tashnewbie
Posts: 2234
Joined: Thu Apr 23, 2020 12:44 pm

Re: Target fund to 3 fund portfolio

Post by tashnewbie »

What kind of plan is the $750k in? Sounds like it's not a 403b or 457. Is it an IRA or maybe an old employer plan?
Topic Author
Sho
Posts: 5
Joined: Wed Nov 24, 2021 9:38 am

Re: Target fund to 3 fund portfolio

Post by Sho »

Thank you all . I will check about the freedom index funds
The ER for individual fund is low , from .015 to 0.035

Will check and reply .
Topic Author
Sho
Posts: 5
Joined: Wed Nov 24, 2021 9:38 am

Re: Target fund to 3 fund portfolio

Post by Sho »

tashnewbie wrote: Wed Nov 24, 2021 12:03 pm What kind of plan is the $750k in? Sounds like it's not a 403b or 457. Is it an IRA or maybe an old employer plan?
Yes, it’s an old plan
Doctor Rhythm
Posts: 1168
Joined: Mon Jan 22, 2018 3:55 am

Re: Target fund to 3 fund portfolio

Post by Doctor Rhythm »

Welcome - I think index TDFs are a good default option for most investors, and I have a large position in one for my workplace retirement accounts. However, my ER is only 0.04%. At your ER of 0.5%, I would definitely be looking elsewhere. I agree with your choices for US, international, bonds in the various Fidelity funds.

As far as the TDF lagging behind the market, that’s certainly possible (and even probable for actively managed funds), but be careful how you do the comparison. Unless you account for the funds’ specific asset allocation, you can’t compare different TDFs or a TDF to a 3-fund portfolio.
tashnewbie
Posts: 2234
Joined: Thu Apr 23, 2020 12:44 pm

Re: Target fund to 3 fund portfolio

Post by tashnewbie »

Sho wrote: Wed Nov 24, 2021 12:05 pm
tashnewbie wrote: Wed Nov 24, 2021 12:03 pm What kind of plan is the $750k in? Sounds like it's not a 403b or 457. Is it an IRA or maybe an old employer plan?
Yes, it’s an old plan
Depending on the type of account it is and whether there are any funds in the old plan that you can't access in your current plans, then I would explore the option of moving the old plan into one of your current plans (assuming the current plans don't have high administrative fees). This simplifies your portfolio by reducing the number of accounts you have.

At the very least, I would definitely shift the old plan from the expensive target date fund to cheaper funds such as those you've listed.
Silverado
Posts: 838
Joined: Fri Oct 18, 2013 6:07 pm

Re: Target fund to 3 fund portfolio

Post by Silverado »

Doctor Rhythm wrote: Wed Nov 24, 2021 12:10 pm Welcome - I think index TDFs are a good default option for most investors, and I have a large position in one for my workplace retirement accounts. However, my ER is only 0.04%. At your ER of 0.5%, I would definitely be looking elsewhere. I agree with your choices for US, international, bonds in the various Fidelity funds.

As far as the TDF lagging behind the market, that’s certainly possible (and even probable for actively managed funds), but be careful how you do the comparison. Unless you account for the funds’ specific asset allocation, you can’t compare different TDFs or a TDF to a 3-fund portfolio.
Yeah, any time I see some headline about a Target Date Fund outperforming something I immediately assume they are not doing what they told me they would do in the prospectus.
Topic Author
Sho
Posts: 5
Joined: Wed Nov 24, 2021 9:38 am

Re: Target fund to 3 fund portfolio

Post by Sho »

ClaycordJCA wrote: Wed Nov 24, 2021 10:46 am Your current target date fund is actively managed, which explains the high expense ratio. If you prefer a one fund solution, if it is available in your 401k plan consider instead the Fidelity Freedom Index target date funds, which are not actively managed. The expense ratio for the investor class index funds is .12. The ticker for the 2045 Freedom Index fund is FIOFX.
So, I checked , I don’t have access to low ER target fund. My options Fid freedom ( year) K fund , and their expense ratios are high

I wonder why employers chose only the expensive options ?
dbr
Posts: 37901
Joined: Sun Mar 04, 2007 9:50 am

Re: Target fund to 3 fund portfolio

Post by dbr »

Sho wrote: Wed Nov 24, 2021 3:10 pm
ClaycordJCA wrote: Wed Nov 24, 2021 10:46 am Your current target date fund is actively managed, which explains the high expense ratio. If you prefer a one fund solution, if it is available in your 401k plan consider instead the Fidelity Freedom Index target date funds, which are not actively managed. The expense ratio for the investor class index funds is .12. The ticker for the 2045 Freedom Index fund is FIOFX.
So, I checked , I don’t have access to low ER target fund. My options Fid freedom ( year) K fund , and their expense ratios are high

I wonder why employers chose only the expensive options ?
I guess they are sold the more expensive options. It is possible that the cost to them of running the plan would be more if the investment company could not collect income from providing a more expensive fund, that is shifting plan cost onto the employees. Typically a company that offers low cost funds and does not charge the employees the costs of running the plan is subsidizing the plan as an employee benefit. There are corporate plans with good matches that offer investments at ER below or much below 0.10% and charge no plan fees.

A broader comment would be to ask why your employer does not want to offer a better benefits package. Their practice here may well extend to other benefits, such as the quality and cost of the health plan, vacation policy, 401k match, profit and performance sharing, etc. I think usually corporations pay a lot of attention to their competitiveness on salary and benefits relative to their peer group in the industry. If you want better benefits a move to an employer in an industry group that is more competitive might be indicated.
Topic Author
Sho
Posts: 5
Joined: Wed Nov 24, 2021 9:38 am

Re: Target fund to 3 fund portfolio

Post by Sho »

Thanks to all of you

Did some more research and found out that both 457 and
403 have FFOLX Fidelity Freedom 2045 institutional premium
Class with ER 0.08% , available through brokerage within tax deferred ? Anyone with experience with this fund

For the other old 401 account , looks like the only option would be to create 3 fund portfolio with FXAIX( wish they had something like total market fund , but guess this FID 500 would do , along with FSPSX and FXNAX

Thanks again.
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