Employer dropped the index bond fund in my 401k for an active one -- now what to do?

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TheDan666
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Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by TheDan666 »

So yeah this pretty much sucks. Previously it was a Blackrock US Debt Index fund which was super low cost and was exactly what everyone in the entire company needed. Cut to the replacement with "Active Bond" fund which doesn't even have a ticker symbol. It has these attributes:

0.35% expense ratio
Benchmark: US Agg Bond TR
Investment Objective
The investment seeks to maximize long-term total return and agency-backed securities, mortgage-backed securities, asset backed securities, and corporate bonds. The fund invests across the U.S. and abroad, including emerging markets, and may purchase securities of varying maturities issued by domestic and foreign corporations and governments. It can invest up to 20% of the fund's net assets in securities rated below investment grade.
Prospectus:
https://my.voya.com/static/epweb/pdf/ffs/HR02.PDF

So not ideal. I also have a stable value fund I could use. Again no ticker but it has the following attributes:

0.32% expense ratio
Benchmark: Bloomberg US Agg Interm TR USD
Investment Objective
The strategy seeks to outperform the total return of the Bloomberg U.S. Aggregate Intermediate Bond Index* over a 2- to 3-year horizon. *The Bloomberg U.S. Aggregate Intermediate Bond Index is an unmanaged index of intermediate duration fixed income securities.
Prospectus:
https://my.voya.com/static/epweb/pdf/ffs/HR01.PDF

So here is the thing. I don't have anywhere else besides my 401k to take on any more bond percentage. My rollover is already 100% bond. The current percentage in my 401k represents 13%. I'm dedicating 25% of my bond ongoing to my 401k contribution. This money has to go somewhere basically.

Both options are bad. Which one is less bad?

Thanks!

--Chris
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whodidntante
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by whodidntante »

Go with the lower cost one. Sounds like your employer isn't very good at negotiating the plan, assets in the plan dropped, or they started passing more costs on to employees. The last two would be pretty alarming, and the first one is not that good. But overall your plan is not the worst I've seen, or experienced.

Does the plan have a brokerage window provision? That can allow you to rescue assets from high fee funds.

Does the plan have mega backdoor Roth provisions? That's another way to get money out of a bad plan while still getting some tax advantages.

I took a 401k loan a few years back to rescue funds from a bad plan, and as a tax maneuver. It worked very well, but this forum is pretty averse to 401k loans so don't tell anybody if it works for you. :P
alex_686
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by alex_686 »

This is a Collective Investment Trust. CITs have lower expenses than funds. They can only be offered in retirement plans. This is a non-event.

I suspect that the new fund is also going to be a non-event. There are some odd weird costs in running a index bond fund. Mostly around trading. Trading costs are not part of the reported expense ratio. Most of these types of funds are semi-passive. To be truly passive you must match the index CUSIP by CUSIP. A semi-passive fund will follow the index's character. For example, the index says you must by the current on-the-run 5 year treasury. However, the off-the-run treasury, for example a 10 year treasury that is 5 years old, may be cheaper.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by alex_686 »

whodidntante wrote: Tue Apr 02, 2024 8:02 pm Go with the lower cost one.
I wouldn't. I would go for the one that best matched my goals and risk tolerance. If not that, then the one with the highest SEC yield. Yield is reported after expenses.

You want yield. That is the important thing. Expenses are only important in how they affect the yield. Key you eye on the top line, don't let it be distracted by secondary things.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
lostinjersey
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by lostinjersey »

Active bond funds are not inherently bad. It’s a lot of work to manage a bond fund, and many companies offer an actively managed fund in their 401k lineup because they tend to perform better than many index bond funds. A CIT is low cost option that’s not publicly traded.

I would stick with the new fund if you want a true bond fund. That’s not the same as a stable value fund.
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TheDan666
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by TheDan666 »

whodidntante wrote: Tue Apr 02, 2024 8:02 pm Does the plan have a brokerage window provision? That can allow you to rescue assets from high fee funds.

Does the plan have mega backdoor Roth provisions? That's another way to get money out of a bad plan while still getting some tax advantages.

I took a 401k loan a few years back to rescue funds from a bad plan, and as a tax maneuver. It worked very well, but this forum is pretty averse to 401k loans so don't tell anybody if it works for you. :P
No brokerage option.

Mega backdoor. I believe it does but I'm not sure I'm the best candidate as I'm not even maxing out my 401k right (decently close though) and I'm not swimming in cash for the tax costs. I've a got a really good friend is an investment educator and I'd really like to pick his brain on this.

401k loan. Yes it does but only for up to $50,000 which is a basically half of my current bond balance.
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TheDan666
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by TheDan666 »

lostinjersey wrote: Tue Apr 02, 2024 8:12 pm Active bond funds are not inherently bad. It’s a lot of work to manage a bond fund, and many companies offer an actively managed fund in their 401k lineup because they tend to perform better than many index bond funds. A CIT is low cost option that’s not publicly traded.

I would stick with the new fund if you want a true bond fund. That’s not the same as a stable value fund.
Yeah I think I just finally found something that made me see the new fund is just fine except a higher expense ratio:

Code: Select all

Bond Funds
BlackRock US Debt Index Fund W 02/01/01 -1.11% -3.48% -3.17% -2.62% 3.34% 2.76% 2.53% 4.27% 0.04%(expense ratio)
Bloomberg U.S. Aggregate Bond Index         -1.12% -3.49% -3.25% -2.64% 3.30% 2.71% 2.47% ‐‐‐

Active Bond 01/01/17                                -1.24% -3.57% -3.33% -2.46% 2.65% 2.94% N/A 3.22% 0.35%(expense ratio)
Bloomberg U.S. Aggregate Bond Index         -1.12% -3.49% -3.25% -2.64% 3.30% 2.71% 2.47% ‐‐‐
Thanks! I'll keep it in the Active fund and go one with the rest of my life. Some times I just need to be talked into doing nothing.

--Chris
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dratkinson
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by dratkinson »

Idea. If married:
--If spouse has good bond options, then fill your 401k with stocks, and spouse's with bonds to match your (plural) AA.
--If spouse is not working, they still qualify for spousal IRA (based on your income) ...so, can put bonds into it.



Idea. If not married and you have more to invest than will fit into your 401k, then can fill your 401k with good stocks, and put your excess money into bonds in taxable, as a muni fund/ETF. Why? Muni dividends don't add to AGI, so don't push you toward next higher tax bracket.

Example. Assume 22% fed tax bracket. Muni TEY (taxable-equivalent yield) = muni SEC yield / (1-fed tax bracket).
--BND (TBM ETF) SEC yield = 4.49%; see: https://investor.vanguard.com/investmen ... rofile/bnd
--VTEB (national muni index ETF) = 3.36% / (1-.22) = 4.31%; see: https://investor.vanguard.com/investmen ... ofile/vteb

I followed the advice, "Don't be too greedy, leave 10% for the other guy", (unknown). In the 22% fed tax bracket, the difference in after-tax yields between BND/VTEB is ~4% (=4.49/4.31 -1), so within the 10% tolerance to be good enough.

Lather, rinse, repeat for your tax bracket.


One large benefit of having (some) bonds in taxable is that they can be used as an extended tier of your first-tier EFs (checking, savings, CDs,...). Why? You'll be surprised by how financial emergencies shrink to become financial annoyances once you have >2yrs of living expenses in bonds in taxable.


The recommendation to use bonds in taxable as an extended-tier EF is based on:
During a crash:
--Stocks can lose 50-90%.
--Bonds can lose 5-15% ...and can be TLHed. (I have. It wasn't terrible.)
--Crashes typically recover within ~4yrs. There have been exceptions.
--Stock/bond crashes are not typically coincidental. There have been exceptions.
--Worst case. If you really need the bond money to be there, then overfill bond principal to ~120% (= 1/(1-.15)) of anticipated need and stop worrying.


Hierarchy of goodness among account types.
(less good) Traditional/Tax-deferred accounts -- Taxable accounts -- Roth/Tax-free accounts (more good)

Why?
--Everything withdrawn from traditional accounts is taxed as ordinary income: lose benefits from QDI, TLCG, FTC. A benefit is that some contributions are tax deductible ...a good thing to stay out of a higher tax bracket.
--Everything withdrawn from taxable can benefit from: QDI, TLCG, FTC, TE dividends.
--Everything withdrawn from Roth is: tax-free. The bad thing is that all contributions are after-tax.

Bottom line. Investing in taxable is not a bad thing ...unless you really need a tax-deductible contribution to avoid a higher tax bracket ...which only affects the last dollars earned, not all dollars.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
exodusNH
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by exodusNH »

TheDan666 wrote: Tue Apr 02, 2024 8:14 pm 401k loan. Yes it does but only for up to $50,000 which is a basically half of my current bond balance.
$50,000 is the IRS limit. It's actually 50% of your balance or $50,000, whichever is smaller.
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Raspberry-503
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by Raspberry-503 »

The new fund seems to be chasing higher yields and is therefore more risky for a potentially higher reward. It's not a horrible choice, and higher ER but not horrible, so you may just have to put up with it and not stress about it. As other suggested if you have other accounts with better bond choices you could invest in bonds somewhere else like a tIRA, but if you can't you're still OK
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TheDan666
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by TheDan666 »

dratkinson wrote: Tue Apr 02, 2024 11:44 pm Idea. If married:
--If spouse has good bond options, then fill your 401k with stocks, and spouse's with bonds to match your (plural) AA.
--If spouse is not working, they still qualify for spousal IRA (based on your income) ...so, can put bonds into it.



Idea. If not married and you have more to invest than will fit into your 401k, then can fill your 401k with good stocks, and put your excess money into bonds in taxable, as a muni fund/ETF. Why? Muni dividends don't add to AGI, so don't push you toward next higher tax bracket.

Example. Assume 22% fed tax bracket. Muni TEY (taxable-equivalent yield) = muni SEC yield / (1-fed tax bracket).
--BND (TBM ETF) SEC yield = 4.49%; see: https://investor.vanguard.com/investmen ... rofile/bnd
--VTEB (national muni index ETF) = 3.36% / (1-.22) = 4.31%; see: https://investor.vanguard.com/investmen ... ofile/vteb

I followed the advice, "Don't be too greedy, leave 10% for the other guy", (unknown). In the 22% fed tax bracket, the difference in after-tax yields between BND/VTEB is ~4% (=4.49/4.31 -1), so within the 10% tolerance to be good enough.

Lather, rinse, repeat for your tax bracket.


One large benefit of having (some) bonds in taxable is that they can be used as an extended tier of your first-tier EFs (checking, savings, CDs,...). Why? You'll be surprised by how financial emergencies shrink to become financial annoyances once you have >2yrs of living expenses in bonds in taxable.


The recommendation to use bonds in taxable as an extended-tier EF is based on:
During a crash:
--Stocks can lose 50-90%.
--Bonds can lose 5-15% ...and can be TLHed. (I have. It wasn't terrible.)
--Crashes typically recover within ~4yrs. There have been exceptions.
--Stock/bond crashes are not typically coincidental. There have been exceptions.
--Worst case. If you really need the bond money to be there, then overfill bond principal to ~120% (= 1/(1-.15)) of anticipated need and stop worrying.


Hierarchy of goodness among account types.
(less good) Traditional/Tax-deferred accounts -- Taxable accounts -- Roth/Tax-free accounts (more good)

Why?
--Everything withdrawn from traditional accounts is taxed as ordinary income: lose benefits from QDI, TLCG, FTC. A benefit is that some contributions are tax deductible ...a good thing to stay out of a higher tax bracket.
--Everything withdrawn from taxable can benefit from: QDI, TLCG, FTC, TE dividends.
--Everything withdrawn from Roth is: tax-free. The bad thing is that all contributions are after-tax.

Bottom line. Investing in taxable is not a bad thing ...unless you really need a tax-deductible contribution to avoid a higher tax bracket ...which only affects the last dollars earned, not all dollars.
Spouse is working has a pension so no help there. There is a rollover available but would be a fraction of what I needed and I think it's already filled with bonds anyway.

As far as taxable goes, I could merely just devote that 25% of my contribution going forward to taxable. Swapping the current equity into bonds would be a giant tax hit that would dwarf whatever benefit I might get compared to a larger expense ratio.

I think in terms of management and rebalancing, I'm just gonna go with Keep It Simple Stupid.
jumbo shrimp
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by jumbo shrimp »

Just curious - when a fund is removed from a 401k list, do employees get a chance to choose what to move to and it's not a taxable event? Or do the assets get dumped already from the removed fund? I think I read a bit of this above but want to clarify.
the_wiki
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by the_wiki »

jumbo shrimp wrote: Wed Apr 03, 2024 10:39 am Just curious - when a fund is removed from a 401k list, do employees get a chance to choose what to move to and it's not a taxable event? Or do the assets get dumped already from the removed fund? I think I read a bit of this above but want to clarify.
movement inside a 401k is never a taxable event, and you should always be able to move to whatever you like. When a 401k plan swaps funds, often you get swapped automatically, but you can change to a new fund whenever you like after that.

The only taxable event in a 401k is withdrawing cash.
exodusNH
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by exodusNH »

jumbo shrimp wrote: Wed Apr 03, 2024 10:39 am Just curious - when a fund is removed from a 401k list, do employees get a chance to choose what to move to and it's not a taxable event? Or do the assets get dumped already from the removed fund? I think I read a bit of this above but want to clarify.
If the provider is staying the same, employers don't usually drop funds that have investments, unless that fund fails whatever tests they do to show fiduciary responsibility.

In our fund, we evaluate all of the offerings once a year. If a fund deviates from the performance of its asset class over a certain number of quarters, it goes on a watch list. After a certain number of quarters on that list, it's eligible to be removed. Removal isn't certain.

It's not really standard performance chasing. We look at things like whether the manager has changed or if the philosophy has changed.

In 20 years, we've only dropped one or two funds.

When that happens, a fund that tracks roughly the same is selected and the assets migrated over. There is plenty of notice given to the participants. They can move those investments to another one up until the blackout date. Anyone who has holdings at that time gets mapped into the replacement fund.
the_wiki
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by the_wiki »

It looks like that fund is a close variant of TCW Core fixed income.

That fund has done quite well against Bond index funds.

https://www.portfoliovisualizer.com/fun ... xKLdKJ1CYw

Either way, I would not worry about it and just pick the new total bond fund and keep doing what you are doing.
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dratkinson
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Re: Employer dropped the index bond fund in my 401k for an active one -- now what to do?

Post by dratkinson »

TheDan666 wrote: Wed Apr 03, 2024 10:19 am...

As far as taxable goes, I could merely just devote that 25% of my contribution going forward to taxable. Swapping the current equity into bonds would be a giant tax hit that would dwarf whatever benefit I might get compared to a larger expense ratio.

I think in terms of management and rebalancing, I'm just gonna go with Keep It Simple Stupid.

Idea. Keep your current equities* in taxable (to avoid tax consequences), but make new taxable contributions to bonds.

* Both stocks/bonds in taxable are needed by retirees: stocks for growth to offset inflation, bonds for more stability/distributions than stocks.


Retirement risk: Sequence of Returns Risk*. Some retirees report keeping >5yrs of living expenses in cash equivalents (savings, CDs, bonds,...) in taxable to avoid SoRR---being forced to sell stocks during a down market to pay for retirement living expenses. Why? Since most crashes recover within ~4yrs, having >5yrs in cash equivalents helps avoid SoRR.

* Example. Think of retiring in 2008-2009, market down ~40%, for ~3yrs, with only stocks to sell to pay for living expenses. You want to avoid SoRR.


Retirement risk: Inflation. The biggest retirement risk is reported to be inflation. To offset this risk, some retirees report putting in place an inflation-indexed 5yr CD ladder as they neared retirement. After retirement, each new inflation-indexed CD is purchased from stocks/bonds---whichever is up. And if neither is, then they have 4yrs remaining in CDs to wait for stocks/bonds, one/both to recover.


Ideally, with LBYM (live below your means) and enough in taxable, a retiree can live on dividends (+SS,...) alone.
--This means having several years of living expenses in stocks/bonds/cash in taxable.
--You can grow taxable by new-money contributions now, or by withdrawing from traditional accounts after retirement.
--You'll want to empty your traditional accounts before RMDs start and increase tax bracket on surviving spouse.


After reading what other BHs have done---and reported to work for them---I suggest this order of growing taxable/Roth.

First, grow taxable.
--While working, use excess money to invest, to grow taxable to grow dividends to offset living expenses. Consider adding a muni fund*.
--As you near retirement, can consider adding an inflation-indexed 5yr CD ladder. Would it work for you?
--In retirement, withdraw from traditional to continue growing taxable/dividends to offset living expenses.

Last, grow Roth. When taxable dividends are large enough (+SS,...) to cover living expenses, convert remainder of traditional to Roth, to turn off RMDs, travel, ...bequeath.

* Since dividends are the major component of bond fund total return (= NAV appreciation + dividends), I prefer more dividends to less---within our risk tolerance. At Vanguard, I prefer VWLTX (LT national muni fun), but it has no ETF share class.

Non-Vanguard clients may consider VTEB (IT national muni index ETF). I've also read BHs recommending ishare's MUB.



Idea. KISS works, too. For now.



Edit. Clarity, second thoughts.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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