401k Conundrum

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kjm
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Joined: Wed Aug 26, 2009 1:05 pm

401k Conundrum

Post by kjm »

My 401k offers very few index funds. The mutual fund offerings aren't horrible, but I'm interested in indexing. Fortunately, my 401k offers a "self-directed" option. Meaning I can direct any portion of my 401k contribution to a completely unrestricted fund. I can buy individual stocks, bonds, mutual funds, ETFs, whatever. I can even do covered calls. Because my 401k doesn't offer much in the way of index funds, any index fund purchases are going to have to happen through my self-directed account. My question is this: What's the best way of building a position in an index fund within this self-directed account? I assume the ETF share classes are the way to go. I contribute about $400 per bi-weekly paycheck into my 401k. Commissions on trades are $8. If I were to buy into one ETF every paycheck, 2% of my investment would go to fees right off the bat. On the other hand, I could wait 2 months between transactions and pay only 0.5%. The problem with the later approach is that I'd be out of the market and missing out on potential gains. What would you do?

One last thing. If you were in your mid 20s and had to pick between the following bond funds for a 90/10 stock/bond allocation, which would you pick? (I understand the picks aren't perfect and aren't even that comparable)

PIMCO Total Return - PTTRX (ER: 0.52)
Barclays US Debt Index (ER: 0.06)

Thanks!
livesoft
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Post by livesoft »

I own both PIMCO total return and a bond index fund in my 401(k), so I would pick both.

Why not list some of the funds in your 401(k) and their expense ratios? I think the idea would be to invest in the funds, then once a year make one or two $8 trades.
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kjm
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Post by kjm »

Here's a comprehensive list of what my 401k offers. You bring up a good point, livesoft. I could just throw everything into the index fund that tracks the S&P 500 and then buy into an ETF once a year/quarter. That might be the best bet.


Fidelity Institutional Money Market-I 07/05/1985 0.22

Barclays Global Inv US Debt Index-T 10/01/2001 0.06

PIMCO Total Return-Inst 05/11/1987 0.52

Fidelity Puritan 04/16/1947 0.61

Morgan Stanley Inst. Large Cap Relative Value-I 01/31/1990 0.69

AIM Charter-Inst 07/30/1991 0.82

Fidelity Spartan US Equity Index-Adv 10/14/2005 0.07

Barclays Global Inv US Equity Market Index-F 06/03/2002 0.06

Fidelity OTC Portfolio 12/31/1984 1.06

Barclays Global Inv Extended Equity Market-F 06/04/2002 0.10

Wells Fargo Small Cap Value-Inst 07/31/2007 1.01

Fidelity International Discovery 12/31/1986 1.09

Harbor International-Inst 12/29/1987 0.79

Fidelity Freedom Income 10/17/1996 0.48

Fidelity Freedom 2000 10/17/1996 0.49

Fidelity Freedom 2010 10/17/1996 0.64

Fidelity Freedom 2020 10/17/1996 0.72

Fidelity Freedom 2030 10/17/1996 0.76

Fidelity Freedom 2040 09/06/2000 0.79

Fidelity Freedom 2050 06/01/2006 0.82

Fidelity Managed Income Portfolio II 04/20/1993 0.35

Fidelity Low-Priced Stock 12/27/1989 0.99
thenextguy
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Post by thenextguy »

You're right to worry about expenses, but the difference between bi-monthly contributions and waiting every couple of months probably isn't going to make much of a difference by the time you retire.

If you wait, you'll save on comissions, but you'll miss out on some dividends and capital appreciation.

The correct answer will largely depend on the assumptions you make for growth.

Right now, it probably makes sense to wait every couple of months. However, at some point in the future when you're making larger contributions the extra time in the market will be more valuable than savings on comissions.

I wouldn't sweat whatever strategy you go with right now.

On a related note, Fidelity is supposed to be introducing target retirement funds based on index funds soon. Will you have access to those?
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Ted Valentine
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Post by Ted Valentine »

I don't know what kind of allocation you have planned, but going with one of the S&P 500 Indexes along with the extended market fund should cover your US equity options suffiently.

If you want, you could go self-directed for international but I don't think its worth it. Given your age and likelyhood to change jobs in the next couple years, I think paying the 2% to 0.5% "load" is not a good idea. I would probably keep it simple and go with the Harbor international choice. It marks VGTSX quite well and the total expense for you is going to be about the same either way.

I'm not calculating it, but I bet using those 3 funds for stocks in your 401k is cheaper than any self-directed option you come up with.
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.
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kjm
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Post by kjm »

My 401k provides switched from Fidelity to JPM at the beginning of 2009. My guess is that they'll gradually phase out the Fidelity funds and replace them with JPM funds.

Without getting into my AA strategy, I'd like a relatively large small cap exposure (domestic and international).

I'm just weighing the costs of paying what is in effect a one-time load by buying ETFs in my SDA versus paying higher annual fees by buying the managed funds in my "regular" 401k account.

I'd like to hear as many opinions as possible, so chime in anyone.
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grabiner
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Post by grabiner »

kjm wrote:Here's a comprehensive list of what my 401k offers. You bring up a good point, livesoft. I could just throw everything into the index fund that tracks the S&P 500 and then buy into an ETF once a year/quarter. That might be the best bet.
You won't lose much by investing in the mutual funds which come closest to your allocation, and then buying ETFs just once a year, particularly with such good choices:
Barclays Global Inv US Debt Index-T 10/01/2001 0.06


Fidelity Spartan US Equity Index-Adv 10/14/2005 0.07

Barclays Global Inv US Equity Market Index-F 06/03/2002 0.06

Barclays Global Inv Extended Equity Market-F 06/04/2002 0.10
All of these are less expensive than the corresponding ETF, so you can get bonds, large-cap stocks, and small-cap stocks. The international funds aren't as good; probably the best thing to do is to slightly overweight international when you make your regular ETF purchase, and direct new contribuions to the US stock funds so that you move back towards your target.
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livesoft
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Post by livesoft »

There is no point in using ETFs for the asset classes listed by grabiner because your BGI fund choices in these areas are superb and better than the ETF you could get.

So after investing in the BGI indexes, I might purchase VEU and VSS once a year.
pastafarian
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Post by pastafarian »

kjm wrote:My 401k provider switched from Fidelity to JPM at the beginning of 2009. My guess is that they'll gradually phase out the Fidelity funds and replace them with JPM funds...
I'd like to hear as many opinions as possible, so chime in anyone.
I also elected to use the self-directed option with my 401k. Within the brokerage account I can invest in Fido funds at no cost, Vanguard funds cost about $25 per transaction. So I opted for Spartan Total Mkt and Extended Mkt index funds along with Fido's US Bond Index (FBIDX) and get my slice of International SC via an eft (GWX).

The point here being you may still have access to Fido Spartan funds at no cost even after JPM became the custodian. 8) Invest in those index funds and build up your cash position to buy your ISC slice once or twice a year.

Cheers
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kjm
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Post by kjm »

About those BGI funds...

I didn't find the literature for the BGI funds very informative. The associated reading materials lists the fund's recent performance, the top holdings, and that's about it. I don't even see a ticker symbol for those funds. What gives? Can someone tell me a little more about these funds?
On Approach
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Post by On Approach »

About those BGI funds...

I didn't find the literature for the BGI funds very informative. The associated reading materials lists the fund's recent performance, the top holdings, and that's about it. I don't even see a ticker symbol for those funds. What gives? Can someone tell me a little more about these funds?
They more than likely don't have ticker symbols - I believe they're proprietary funds, and you own units (or some equivalent). The Thrift Savings Plan index funds are similar in that respect. The University of California retirement savings plan has UC proprietary index funds - last time I checked into them they were through State Street Global Investors.
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