Bond Funds in 401k

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orthej11
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Bond Funds in 401k

Post by orthej11 »

Hi,
I would like to maintain an asset allocation of 70% stocks and 30% bonds and fixed investments in my 401k. However there are very limited options in my 401k plan at work administered by Principal. There are only 3 funds available for bonds and short term fixed income as follows:

Principal Global Investors Bond and Mortgage Separate Acct
Vanguard Total Bond Market Index Inst Fund
Guaranteed Fund Contract (about 2% return guaranteed)

I have about 6% of my portfolio invested in these funds but am not comfortable investing 30% of my portfolio in these funds. How do I go about maintaining my target asset allocation of 70/30 when the fund offerings are limited? I contribute the maximum allowed per year (16.5K??) to my 401k and also the maximum 5k in my Roth IRA each year.

On another subject should you look at your 401k and Roth IRA investments combined to get to your target asset allocation? They have different tax implications so in my mind they should be looked at separately but what do others think? Any suggestions would be welcome.
livesoft
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Post by livesoft »

What would you be comfortable investing in?

The Vanguard Total Bond Market Index fund is one of the most favorite bond funds on this forum. I do not own any shares of it myself, but why are you uncomfortable investing in it?

And what is wrong with that guaranteed fund contract?

Yes, look at all your accounts together as one big portfolio for asset allocation. I personally would not worry about the tax differences, but some folks do. Read the wiki about "tax-adjusted" asset allocation.
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pkcrafter
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Post by pkcrafter »

On another subject should you look at your 401k and Roth IRA investments combined to get to your target asset allocation? They have different tax implications so in my mind they should be looked at separately but what do others think? Any suggestions would be welcome.
This is exactly why it's beneficial to look at all accounts as part of a single portfolio. The total market bond index and the guaranteed income fund look like good choices if the costs are low enough. If you want some other choices then definitely use the Roth. As far as the tax implication, some investors consider it and some do not. I think it's best to maintain your AA in the targeted percentages you actually hold now. When you withdrawal you then rebalance and compensate for the withdrawal which includes taxes.

Paul
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grberry
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Post by grberry »

Can you confirm more about the funds other than the Vanguard fund? Expense ratios, etc...

I am suspecting that the "Principal Global Investors Bond and Mortgage Separate Acct" is some version of Principal's Bond & Mortgage Securities Inst Fund (ticker: PMSIX), which Morningstar shows has been taking on above average risk for its category and delivering below average returns. Looking at Principal's summary of the fund, it is mostly an intermediate bond fund which they may try to juice the returns of by holding up to 20% stocks or junk bonds.

The Guaranteed Fund Contract looks to be a Stable Value Fund holding mostly GICs and money market funds.

If I'm right about these, since the Vanguard Total Bond Market Index Inst Fund is available it is the only one of the three I would hold as a bond fund in this account. One of the others takes risks that you don't want a bond fund to be taking, while the last is not a bond fund. And I would be willing to hold 30% of my asset allocation in Vanguard Total Bond Market if I had to do that all inside this account.

But your asset allocation does not have to be all in a single account. You should look at all of your investments as a single portfolio, regardless of where they are held. If you review our recommended way to ask portfolio questions you will see that we want percentages as a total of all accounts together. I am personally quite concerned about inflation risk, so I would mix both Vanguard Total Bond Market and Vanguard Inflation Protected Securities as my two bond funds, had I the freedom to do so - but my 401(k) offers neither.
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Ted Valentine
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Re: Bond Funds in 401k

Post by Ted Valentine »

orthej11 wrote:Hi,

Vanguard Total Bond Market Index Inst Fund
That looks like a home run to me.

I have a similar AA for bond/stock as you. The only 401k bond option I have is RBNDX (http://www.google.com/finance?client=ob&q=MUTF:ABNDX). I bite the bullet, even if its not optimal.

Bonds are for safety and diversification. What you have offered in the 401k is a very good choice for that purpose.
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Topic Author
orthej11
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Expense ratios and Principal Global Bond and Mortgage Advice

Post by orthej11 »

All,
Thanks for your input, I appreciate the quick response. The expense ratios of the funds are as follows:

Principal Global Investors Bond and Mortgage Separate Acct - 0.3%
Vanguard Total Bond Market Index Inst Fund - 0.07%
Guaranteed Fund Contract (2.8% return guaranteed) - None

grberry - I looked at the Principal Global Bond and Mortgage Separate Acct and it is similar to the Principal's Bond & Mortgage Securities Inst Fund but not identical. The Morning star "box" shows the credit quality on separate account as medium and PMSIX as low. The other major difference is the lower expense ratio of separate account (0.3%) compared to 0.53% for PMSIX. Also the separate account has 86% of holdings in US bonds (longs) vs 96.8% for PMSIX. Is there still reason to stay away from this fund?
grberry
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Post by grberry »

Given what you have updated, it looks like the Principal Global ... is a reasonable intermediate bond fund. But the Vanguard Total Bond fund has a much better expense ratio. So while there is not reason that I can see now to stay away from that Principal fund, there is good reason to prefer the Vanguard fund. You have access here to the institutional version of this fund, and I can't think of anything better anywhere else that is like it.

And the lack of expense ratio with a guaranteed return on the Guaranteed contract indicates that it is not bonds at all. If you want to split the asset allocations to stocks/bonds/cash, the Guaranteed Contract is where to put the cash portion of the allocation. That isn't the allocation that you were seeking.
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tsturbo
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Post by tsturbo »

Vanguard Total Bond Market Index Inst Fund - 0.07%

This is what I am feeling!
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