How to allocate between 401k with expensive fees + Vangaurd

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cpan00b
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Joined: Wed May 10, 2017 9:39 pm

How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 8:23 pm

I just started working full time and my employer uses Fidelity for its 401k plan. The investment funds available are very limited, and most of them have high fees. I already have a vanguard account with some investments. Can you please help me allocate my assets for efficiency?

First, here is some background info:

Emergency funds: Have 6k in cash
Debt: 0
Tax Filing Status: Single
Tax Rate: In the 28% bracket for 2017, will be 33% bracket in 2018. Maxed out Roth IRA for 2015 and 2016, will be ineligible next year (will have to backdoor)
State of Residence: NY
Age: 28
Desired Asset allocation: 90/10
Desired International allocation: 30%

Current asset allocation:
Name
Amount
% of total portfolio
Expense Ratio

Taxable
VGTSX
Vanguard Total International Stock
$6,055.70
16.3%
0.18

VTSAX
Vanguard Total Stock Market
$17,370.35
46.9%
0.04

BND
Vanguard Total Bond
$1,329.25
3.6%
0.05

Roth
VFFVX
Vanguard Target Retirement 2055
$12,320.49
33.2%
0.16


Total Invested
$37,075.79 100.00%
AA (93% Stocks, 7% Bonds. Within Stocks, I'm 70% domestic and 30% international)


I set my fidelity 401k elections at 50% of my paychecks so I can quickly get up to 18k this year and enter the market asap. I will change my elections to 0 once I meet the quota for this year. The problem is that the funds available are really expensive and limited. I wanted to just pick a simple target date 2045 fund, but the expense ratio is 0.43. Should I just pick a cheap index 500 option instead? How will this affect my VG investments? I plan on investing any excess money I have from my income to buy more stock in my taxable VG brokerage account (goal is to get the admiral shares of the total international stock). Here are all of the funds available in my 401k (and the expense ratio). I've excluded the target date funds which all are 0.43%.

CB LG CAP GROWTH IS (LSITX)08/29/1997 0.77%
COLUMBIA DIV INC Y (CDDYX)03/04/1998 0.59%
FID 500 INDEX INST (FXSIX)02/17/1988 0.03%
FID MID CAP IDX PR (FSCKX)09/08/2011 0.05%
FKLN SM CAP GRTH R6 (FSMLX)05/01/2000 0.65%
UM BEHAVIORAL VAL R6 (UBVFX)12/28/1998 1.02%
AF NEW WORLD R6 (RNWGX)06/17/1999 0.65%
FID INTL INDEX PR (FSIVX)11/05/1997 0.06%
FID REAL ESTATE INVS (FRESX)11/17/1986 0.78%
WT G RETIRE INC F3504/30/2015 0.66%
DOUBLELINE CORE FI I (DBLFX)06/01/2010 0.49%
FID CAPITAL & INCOME (FAGIX)11/01/1977 0.73%
NUVEEN INFL-PRO I (FYIPX)10/01/2004 0.72%
FID RET GOVT MM (FGMXX)12/16/19887 day yield as of08/31/2017   0.66% 0.42%

Thanks in advance!
Last edited by cpan00b on Tue Sep 12, 2017 8:54 pm, edited 1 time in total.

Grt2bOutdoors
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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 8:28 pm

What is the name of the Target Date fund whose expense ratio is 0.43%?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cpan00b
Posts: 16
Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 8:36 pm

Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:28 pm
What is the name of the Target Date fund whose expense ratio is 0.43%?
AF TRGT DATE 2010 R6 (RFTTX)02/01/2007 0.35%
AF TRGT DATE 2015 R6 (RFJTX)02/01/2007 0.35%
AF TRGT DATE 2020 R6 (RRCTX)02/01/2007 0.37%
AF TRGT DATE 2025 R6 (RFDTX)02/01/2007 0.39%
AF TRGT DATE 2030 R6 (RFETX)02/01/2007 0.41%
AF TRGT DATE 2035 R6 (RFFTX)02/01/2007 0.42%
AF TRGT DATE 2040 R6 (RFGTX)02/01/2007 0.43%
AF TRGT DATE 2045 R6 (RFHTX)02/01/2007 0.43%
AF TRGT DATE 2050 R6 (RFITX)02/01/2007 0.43%
AF TRGT DATE 2055 R6 (RFKTX)02/01/2010 0.45%
AF TRGT DATE 2060 R6 (RFUTX)03/27/2015 0.60%

cpan00b
Posts: 16
Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 8:52 pm

So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.

Grt2bOutdoors
Posts: 17138
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Location: New York

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 8:55 pm

cpan00b wrote:
Tue Sep 12, 2017 8:36 pm
Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:28 pm
What is the name of the Target Date fund whose expense ratio is 0.43%?
AF TRGT DATE 2010 R6 (RFTTX)02/01/2007 0.35%
AF TRGT DATE 2015 R6 (RFJTX)02/01/2007 0.35%
AF TRGT DATE 2020 R6 (RRCTX)02/01/2007 0.37%
AF TRGT DATE 2025 R6 (RFDTX)02/01/2007 0.39%
AF TRGT DATE 2030 R6 (RFETX)02/01/2007 0.41%
AF TRGT DATE 2035 R6 (RFFTX)02/01/2007 0.42%
AF TRGT DATE 2040 R6 (RFGTX)02/01/2007 0.43%
AF TRGT DATE 2045 R6 (RFHTX)02/01/2007 0.43%
AF TRGT DATE 2050 R6 (RFITX)02/01/2007 0.43%
AF TRGT DATE 2055 R6 (RFKTX)02/01/2010 0.45%
AF TRGT DATE 2060 R6 (RFUTX)03/27/2015 0.60%
YTD that fund is up 15.68%. Use the target date fund if it's asset allocation meets your needs, which is appears to do some as far as I can tell from the American Funds website.
While 0.43% may be high as compared to actively managed Vanguard funds, the AF's tend to have good track records with long tenured managers. I would not lose a second sleep over it, use that fund. Your plan could be worse. - Yes, there are fund families with actively managed target funds that have both higher expense ratios and mediocre results.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cpan00b
Posts: 16
Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 9:00 pm

Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:55 pm
cpan00b wrote:
Tue Sep 12, 2017 8:36 pm
Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:28 pm
What is the name of the Target Date fund whose expense ratio is 0.43%?
AF TRGT DATE 2010 R6 (RFTTX)02/01/2007 0.35%
AF TRGT DATE 2015 R6 (RFJTX)02/01/2007 0.35%
AF TRGT DATE 2020 R6 (RRCTX)02/01/2007 0.37%
AF TRGT DATE 2025 R6 (RFDTX)02/01/2007 0.39%
AF TRGT DATE 2030 R6 (RFETX)02/01/2007 0.41%
AF TRGT DATE 2035 R6 (RFFTX)02/01/2007 0.42%
AF TRGT DATE 2040 R6 (RFGTX)02/01/2007 0.43%
AF TRGT DATE 2045 R6 (RFHTX)02/01/2007 0.43%
AF TRGT DATE 2050 R6 (RFITX)02/01/2007 0.43%
AF TRGT DATE 2055 R6 (RFKTX)02/01/2010 0.45%
AF TRGT DATE 2060 R6 (RFUTX)03/27/2015 0.60%
YTD that fund is up 15.68%. Use the target date fund if it's asset allocation meets your needs, which is appears to do some as far as I can tell from the American Funds website.
While 0.43% may be high as compared to actively managed Vanguard funds, the AF's tend to have good track records with long tenured managers. I would not lose a second sleep over it, use that fund. Your plan could be worse. - Yes, there are fund families with actively managed target funds that have both higher expense ratios and mediocre results.

To play devil's advocate, The 500 index fund that Fidelity has is up 16.2% YTD and also out performed it on the 5 year comparison, so I'm not sure if that is valid reasoning for me to pay the higher expenses instead of self allocating with the strategy I laid out in my previous post above.

Grt2bOutdoors
Posts: 17138
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Location: New York

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 9:02 pm

cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
You could do that ^^ The issue is though, you'd have to buy more mid and small cap stock as well. The S&P 500 represents about 80% of total market capitalization, the remaining 20% is composed of mid/small caps. VTSAX holds the entire market cap - LC/MC/SC. If your blended rate with the Vanguard funds is say 0.10, what you are talking about is paying an extra 0.33 for the AF fund that holds all asset classes, albeit actively managed. An $18K contribution would cost you an additional $59.40 in year one. At your tax bracket, your hourly rate is going to be more than $59.40, so is it worth your time to figure out how to balance your accounts to make the allocation work? At least until you can research it more thoroughly?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Lou354
Posts: 473
Joined: Sun Apr 03, 2016 10:51 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Lou354 » Tue Sep 12, 2017 9:10 pm

cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
There's no problem with just using the SP500 index tracking fund in your 401k. If you want, you can also use the midcap fund to more closely approximate the total US market. Or you could use a completion fund or both a small cap indx fund and a mid cap index fund in your Roth IRA.

American Funds often have a sales load. If yours does that's a bigger reason not to use the target date funds in your 401k than the 0.43% ER.

At your tax bracket, you should be using a tax exempt municipal bond fund in the taxable account rather than BND.

cpan00b
Posts: 16
Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 9:12 pm

Grt2bOutdoors wrote:
Tue Sep 12, 2017 9:02 pm
cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
You could do that ^^ The issue is though, you'd have to buy more mid and small cap stock as well. The S&P 500 represents about 80% of total market capitalization, the remaining 20% is composed of mid/small caps. VTSAX holds the entire market cap - LC/MC/SC. If your blended rate with the Vanguard funds is say 0.10, what you are talking about is paying an extra 0.33 for the AF fund that holds all asset classes, albeit actively managed. An $18K contribution would cost you an additional $59.40 in year one. At your tax bracket, your hourly rate is going to be more than $59.40, so is it worth your time to figure out how to balance your accounts to make the allocation work? At least until you can research it more thoroughly?
True, you're probably right about it not being worth my time. But thank you, this is the knowledge I needed!

Looking into the VG makeup of VTSAX, it looks like it's large cap 72%, Midcap 20%, and small cap 8%.
Is S&P 500 just large cap? If that's the case, can't I just allocate my 18,000/year as 75-25 in Fidelity as follows:

500 INDEX INST (FXSIX) 0.03%
FID MID CAP IDX PR (FSCKX) 0.05%

Unfortunately, the plan doesn't have a small cap index so I guess it wouldn't be exact.

Grt2bOutdoors
Posts: 17138
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Location: New York

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 9:13 pm

cpan00b wrote:
Tue Sep 12, 2017 9:00 pm
Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:55 pm
cpan00b wrote:
Tue Sep 12, 2017 8:36 pm
Grt2bOutdoors wrote:
Tue Sep 12, 2017 8:28 pm
What is the name of the Target Date fund whose expense ratio is 0.43%?
AF TRGT DATE 2010 R6 (RFTTX)02/01/2007 0.35%
AF TRGT DATE 2015 R6 (RFJTX)02/01/2007 0.35%
AF TRGT DATE 2020 R6 (RRCTX)02/01/2007 0.37%
AF TRGT DATE 2025 R6 (RFDTX)02/01/2007 0.39%
AF TRGT DATE 2030 R6 (RFETX)02/01/2007 0.41%
AF TRGT DATE 2035 R6 (RFFTX)02/01/2007 0.42%
AF TRGT DATE 2040 R6 (RFGTX)02/01/2007 0.43%
AF TRGT DATE 2045 R6 (RFHTX)02/01/2007 0.43%
AF TRGT DATE 2050 R6 (RFITX)02/01/2007 0.43%
AF TRGT DATE 2055 R6 (RFKTX)02/01/2010 0.45%
AF TRGT DATE 2060 R6 (RFUTX)03/27/2015 0.60%
YTD that fund is up 15.68%. Use the target date fund if it's asset allocation meets your needs, which is appears to do some as far as I can tell from the American Funds website.
While 0.43% may be high as compared to actively managed Vanguard funds, the AF's tend to have good track records with long tenured managers. I would not lose a second sleep over it, use that fund. Your plan could be worse. - Yes, there are fund families with actively managed target funds that have both higher expense ratios and mediocre results.

To play devil's advocate, The 500 index fund that Fidelity has is up 16.2% YTD and also out performed it on the 5 year comparison, so I'm not sure if that is valid reasoning for me to pay the higher expenses instead of self allocating with the strategy I laid out in my previous post above.
Not an apples to apples comparison. The 500 Index holds large cap stock only. VTSAX holds entire market cap and is up 11.98% through September 11th. The Vanguard 500 index is up 12.68%. The Fidelity 500 index is not up 16.98% YTD, it's up 11.91%. Notice the difference in returns between the two fund families, both indexed, yet one is clearly outperforming the other. The return you are quoting for the Fidelity 500 index is the 1 year return - as in September 11, 2016 to September 11, 2017. Huge difference. All I'm saying is your plan will not be a fully diversified one because it lacks exposure to about 20-25% of the domestic market so you may lose some return from not being exposed to the market. You're concerned about 0.33% in er, when you could be missing out on more than that if your underexposure leads to under performance.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cpan00b
Posts: 16
Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 9:14 pm

Lou354 wrote:
Tue Sep 12, 2017 9:10 pm
cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
There's no problem with just using the SP500 index tracking fund in your 401k. If you want, you can also use the midcap fund to more closely approximate the total US market. Or you could use a completion fund or both a small cap indx fund and a mid cap index fund in your Roth IRA.

American Funds often have a sales load. If yours does that's a bigger reason not to use the target date funds in your 401k than the 0.43% ER.

At your tax bracket, you should be using a tax exempt municipal bond fund in the taxable account rather than BND.
Ah I guess this gets to what I just asked in my last post. Thank you! Also I will look into exchanging BND for a municipal bond. I do want to move out bonds into my nontaxable account, but it is currently such a nominal amount that I left it as is.

Grt2bOutdoors
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Location: New York

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 9:15 pm

cpan00b wrote:
Tue Sep 12, 2017 9:12 pm
Grt2bOutdoors wrote:
Tue Sep 12, 2017 9:02 pm
cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
You could do that ^^ The issue is though, you'd have to buy more mid and small cap stock as well. The S&P 500 represents about 80% of total market capitalization, the remaining 20% is composed of mid/small caps. VTSAX holds the entire market cap - LC/MC/SC. If your blended rate with the Vanguard funds is say 0.10, what you are talking about is paying an extra 0.33 for the AF fund that holds all asset classes, albeit actively managed. An $18K contribution would cost you an additional $59.40 in year one. At your tax bracket, your hourly rate is going to be more than $59.40, so is it worth your time to figure out how to balance your accounts to make the allocation work? At least until you can research it more thoroughly?
True, you're probably right about it not being worth my time. But thank you, this is the knowledge I needed!

Looking into the VG makeup of VTSAX, it looks like it's large cap 72%, Midcap 20%, and small cap 8%.
Is S&P 500 just large cap? If that's the case, can't I just allocate my 18,000/year as 75-25 in Fidelity as follows:

500 INDEX INST (FXSIX) 0.03%
FID MID CAP IDX PR (FSCKX) 0.05%

Unfortunately, the plan doesn't have a small cap index so I guess it wouldn't be exact.
You could do that, but then you need to find a bond fund either in taxable or elsewhere to balance out the over weigh in equities.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Location: New York

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Grt2bOutdoors » Tue Sep 12, 2017 9:16 pm

cpan00b wrote:
Tue Sep 12, 2017 9:14 pm
Lou354 wrote:
Tue Sep 12, 2017 9:10 pm
cpan00b wrote:
Tue Sep 12, 2017 8:52 pm
So is there any problem with me just using my 18k/year 401k contributions to buy the 500 index with the low expense ratio? To offset that, I would have to buy more international stock in my VG taxable account to maintain a 70/30% ratio, and then add some bonds to my target retirement roth account to bring up my AA to 90-10.

This way I wouldn't have to pay the .43% expense fee for going with the simple target retirement fund in the fidelity 401k.

Is it problematic to be invested in the 500 index? I was mostly buying VTSAX in my VG account, which correct me if I'm wrong, had more diversification then just the 500.
There's no problem with just using the SP500 index tracking fund in your 401k. If you want, you can also use the midcap fund to more closely approximate the total US market. Or you could use a completion fund or both a small cap indx fund and a mid cap index fund in your Roth IRA.

American Funds often have a sales load. If yours does that's a bigger reason not to use the target date funds in your 401k than the 0.43% ER.

At your tax bracket, you should be using a tax exempt municipal bond fund in the taxable account rather than BND.
Ah I guess this gets to what I just asked in my last post. Thank you! Also I will look into exchanging BND for a municipal bond. I do want to move out bonds into my nontaxable account, but it is currently such a nominal amount that I left it as is.
Institutional class shares of American Funds do not pay a sales load. Retail investors pay a sales load, the OP is in the institutional class of shares. Here is the link with fee disclosure: https://www.americanfunds.com/individua ... fund/rfitx
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cpan00b
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Joined: Wed May 10, 2017 9:39 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 9:20 pm

Grt2bOutdoors wrote:
Tue Sep 12, 2017 9:13 pm



Not an apples to apples comparison. The 500 Index holds large cap stock only. VTSAX holds entire market cap and is up 11.98% through September 11th. The Vanguard 500 index is up 12.68%. The Fidelity 500 index is not up 16.98% YTD, it's up 11.91%. Notice the difference in returns between the two fund families, both indexed, yet one is clearly outperforming the other. The return you are quoting for the Fidelity 500 index is the 1 year return - as in September 11, 2016 to September 11, 2017. Huge difference. All I'm saying is your plan will not be a fully diversified one because it lacks exposure to about 20-25% of the domestic market so you may lose some return from not being exposed to the market. You're concerned about 0.33% in er, when you could be missing out on more than that if your underexposure leads to under performance.

Ah I did indeed look at the wrong return rate oops.

And you're absolutely right! I agree with you completely about my plan not being fully diversified and more difficult than just paying the expense fee for the target ratio. But this is a great exercise for learning about AA and how I can simulate the breakdown using these other index funds if I wanted to.

Lou354
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Joined: Sun Apr 03, 2016 10:51 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Lou354 » Tue Sep 12, 2017 9:26 pm

Grt2bOutdoors wrote:
Tue Sep 12, 2017 9:16 pm
Institutional class shares of American Funds do not pay a sales load. Retail investors pay a sales load, the OP is in the institutional class of shares. Here is the link with fee disclosure: https://www.americanfunds.com/individua ... fund/rfitx
Thanks for looking into that. In that case I agree the AF target date fund could be a good choice.

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badbreath
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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by badbreath » Tue Sep 12, 2017 10:07 pm

At your age I would just use the

FID 500 INDEX INST (FXSIX)02/17/1988 0.03%
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

cpan00b
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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 12, 2017 10:47 pm

I have two questions about tax efficiency as I try to reallocate (purchase more bonds) and get back to a 90-10 AA:

1) Preferably, it would have been good to put my taxable instruments into my roth IRA account. However, I already maxed out my roth with 11k of contributions for 2016+2017. I would like to move the BND I hold in my taxable account to the roth, but exchanging the funds in there will be considered a sale and buy, or taxable event, by the IRS, correct?

2) The other option I see is to sell BND and buy a muni bond ETF. The best option looks like VTEB (Vanguard Tax-Exempt Bond ETF). It's a bit of a higher fee, but that is negligible. It doesn't look like its performed as well though. Is it still the best option? Any other suggestions?

Btw, no cheap bond funds in my 401k, so that's out.

TIAX
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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by TIAX » Tue Sep 12, 2017 11:24 pm

Your 500 and international funds in the 401(k) are excellent. Use those and then buy the Vanguard Extended Market Index Fund in your Roth IRA and/or taxable account to approximate the total stock market.

Lou354
Posts: 473
Joined: Sun Apr 03, 2016 10:51 pm

Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Lou354 » Wed Sep 13, 2017 3:30 am

cpan00b wrote:
Tue Sep 12, 2017 10:47 pm
I have two questions about tax efficiency as I try to reallocate (purchase more bonds) and get back to a 90-10 AA:

1) Preferably, it would have been good to put my taxable instruments into my roth IRA account. However, I already maxed out my roth with 11k of contributions for 2016+2017. I would like to move the BND I hold in my taxable account to the roth, but exchanging the funds in there will be considered a sale and buy, or taxable event, by the IRS, correct?
The sale of BND in the taxable account will be a taxable event. The buying and selling of funds inside the Roth IRA is not a taxable event. That's one of the nice things about tax-advantaged accounts. You can buy and sell and rebalance without tax consequences.
2) The other option I see is to sell BND and buy a muni bond ETF. The best option looks like VTEB (Vanguard Tax-Exempt Bond ETF). It's a bit of a higher fee, but that is negligible. It doesn't look like its performed as well though. Is it still the best option? Any other suggestions?
You could also consider intermediate term tax exempt bond fund (VWITX).
Btw, no cheap bond funds in my 401k, so that's out.
You could use a target date fund in your 401k for your bond allocation. Pick one with the amount of bonds you want regardless of the stated target year.

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Duckie
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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Duckie » Wed Sep 13, 2017 4:46 pm

cpan00b wrote:BND
Vanguard Total Bond
$1,329.25
It's not much, but a taxable bond fund does not belong in a taxable account.
Roth
VFFVX
Vanguard Target Retirement 2055
$12,320.49
This account should have individual funds instead of this target-date fund.
Here are all of the funds available in my 401k (and the expense ratio).
The best options are:
  • FID 500 INDEX (FXSIX) 0.03% -- Large caps, 80% of US stocks
  • FID INTL INDEX (FSIVX) 0.06% -- Developed markets, 75% of international stocks
  • DOUBLELINE CORE FI (DBLFX) 0.49% -- US bonds
You have an AA of 90% stocks, 10% bonds (low), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds. As of the end of the year you could have:

Taxable at Vanguard -- $25K -- 45%
32% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
13% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.18%)

401k at Fidelity -- $18K -- 33%
23% (FXSIX) Fidelity 500 Index Fund Institutional Class (0.03%)
10% (DBLFX) DoubleLine Core Fixed Income Fund Class I (0.49%)

Roth IRA at Vanguard -- $12K -- 22%
8% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.15%)
14% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.18%)

My comments:
  • This ignores the tax cost of selling BND in taxable.
  • This puts all the international at Vanguard because TISM is a better fund than FSIVX.
  • I wanted to make the Roth IRA all TISM but didn't because of the tax cost of selling some TISM in taxable.
  • At age 28 you should hold at least 20% bonds. 10% is low.
  • Eventually you may want to add VEXMX Extended Market to the Roth IRA. 80% large caps (FXSIX in the 401k) plus 20% mid/small caps (VEXMX) makes up the total US stock market.
Just some possibilities.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Wed Sep 13, 2017 7:51 pm

Duckie wrote:
Wed Sep 13, 2017 4:46 pm
Roth
VFFVX
Vanguard Target Retirement 2055
$12,320.49
This account should have individual funds instead of this target-date fund.


Roth IRA at Vanguard -- $12K -- 22%
8% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.15%)
14% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.18%)

My comments:
  • This ignores the tax cost of selling BND in taxable.
  • This puts all the international at Vanguard because TISM is a better fund than FSIVX.
  • I wanted to make the Roth IRA all TISM but didn't because of the tax cost of selling some TISM in taxable.
  • At age 28 you should hold at least 20% bonds. 10% is low.
  • Eventually you may want to add VEXMX Extended Market to the Roth IRA. 80% large caps (FXSIX in the 401k) plus 20% mid/small caps (VEXMX) makes up the total US stock market.
Just some possibilities.
What's the reasoning behind having more VTSMX and VGTSX in my roth as opposed to the retirement fund? Are those funds that much better? I won't qualify for admiral shares since it won't tack onto the shares I already own and have amassed in the taxable account.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by Duckie » Thu Sep 14, 2017 5:04 pm

cpan00b wrote:What's the reasoning behind having more VTSMX and VGTSX in my roth as opposed to the retirement fund? Are those funds that much better?
The target-retirement fund is a balanced fund with US stocks, international stocks, and bonds. The two funds I mentioned are individual funds. All of the funds I recommend are individual funds, not balanced. The target-retirement fund holds both VTSMX and VGTSX. This way you hold them separately and get to choose your precise allocation.
I won't qualify for admiral shares since it won't tack onto the shares I already own and have amassed in the taxable account.
After another couple of years of contributions (backdoor if necessary) at least one of the funds will grow to admiral shares and in a couple more years the other fund will. Then you'll have the cheaper costs. The target-retirement fund will always have the slightly higher cost investor shares.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by retiredjg » Thu Sep 14, 2017 5:20 pm

This puzzle cannot be fit together without knowing how many dollars will be going into each account each year (at least to start).

And you will almost surely have to use a bond or fixed income fund in the 401k because that is where most of your money is going. Check to see if there is a stable value fund (sometimes called a guaranteed income fund) in your 401k. It may be listed in a different place. If so, what is it paying this year?

You need to take the bond fund out of your taxable account. Total Bond market should not be in taxable in your tax bracket. If you absolutely must have a bond fund in taxable (I wouldn't), you need to use a tax-exempt bond fund, some possibly being a state specific tax-exempt bond fund.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Sat Sep 16, 2017 4:43 am

Duckie wrote:
Thu Sep 14, 2017 5:04 pm
cpan00b wrote:What's the reasoning behind having more VTSMX and VGTSX in my roth as opposed to the retirement fund? Are those funds that much better?
The target-retirement fund is a balanced fund with US stocks, international stocks, and bonds. The two funds I mentioned are individual funds. All of the funds I recommend are individual funds, not balanced. The target-retirement fund holds both VTSMX and VGTSX. This way you hold them separately and get to choose your precise allocation.
That makes sense. Thank you.
retiredjg wrote:
Thu Sep 14, 2017 5:20 pm

You need to take the bond fund out of your taxable account. Total Bond market should not be in taxable in your tax bracket. If you absolutely must have a bond fund in taxable (I wouldn't), you need to use a tax-exempt bond fund, some possibly being a state specific tax-exempt bond fund.
I sold BND and removed from my taxable account. What's wrong with having VWITX (Intermediate term tax exempt bond fund) in my taxable instead of in my roth?

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by student » Sat Sep 16, 2017 6:31 am

cpan00b wrote:
Sat Sep 16, 2017 4:43 am
I sold BND and removed from my taxable account. What's wrong with having VWITX (Intermediate term tax exempt bond fund) in my taxable instead of in my roth?
The gives the rationale. https://www.bogleheads.org/wiki/Tax-eff ... _placement

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by retiredjg » Sat Sep 16, 2017 8:20 am

cpan00b wrote:What's wrong with having VWITX (Intermediate term tax exempt bond fund) in my taxable instead of in my roth?
The Intermediate Term Tax Exempt bond fund can go in your taxable account if you want bonds there. You would NOT put that fund in a Roth IRA under most circumstances because it should pay you less in the long run. Tax exempt bonds should (almost) always be used only in taxable accounts. (I'm not sure that is what you meant to ask though.)

Because the majority of most people's contributions go into the 401k, most people find it necessary or convenient to hold a bond fund in the 401k. Your choices are not particularly good. That's why I suggested seeing if there is a stable value fund available there. It could be used instead.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Sun Sep 17, 2017 8:43 pm

retiredjg wrote:
Sat Sep 16, 2017 8:20 am
cpan00b wrote:What's wrong with having VWITX (Intermediate term tax exempt bond fund) in my taxable instead of in my roth?
The Intermediate Term Tax Exempt bond fund can go in your taxable account if you want bonds there. You would NOT put that fund in a Roth IRA under most circumstances because it should pay you less in the long run. Tax exempt bonds should (almost) always be used only in taxable accounts. (I'm not sure that is what you meant to ask though.)

Because the majority of most people's contributions go into the 401k, most people find it necessary or convenient to hold a bond fund in the 401k. Your choices are not particularly good. That's why I suggested seeing if there is a stable value fund available there. It could be used instead.


Thanks, I know that. I asked that because in the lines I originally quoted by you, you said you wouldn't hold a bond in your taxable account. I figure if it's a tax exempt bond, it wouldn't be a problem. My 401k has pretty much nothing good except the 500 index.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by sambb » Sun Sep 17, 2017 8:45 pm

The expense ratios are really not bad at all. Your asset allocation matter so much more, as does your savings rate. I wouldnt worry about it for a long time.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by retiredjg » Mon Sep 18, 2017 6:18 am

cpan00b wrote:...you said you wouldn't hold a bond in your taxable account. I figure if it's a tax exempt bond, it wouldn't be a problem. My 401k has pretty much nothing good except the 500 index.
A tax exempt bond in taxable is not a "problem", but it is not a good choice for your entire bond allocation in my opinion. Tax-exempt bonds are less diversified than a broad bond index fund and they carry somewhat more risk. And in the long run, you may make less money using only a tax-exempt bond. It is true they have done well in the recent low interest rate environment, but you cannot assume that will continue.

If you have no stable value fund in the 401k, I'd put at least half, maybe all, of my bond allocation in the Roth IRA. I might even use a 5% slice of that Doubleline Core bond fund in the 401k even though it is of lower quality than I usually prefer.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Mon Sep 18, 2017 8:50 pm

retiredjg wrote:
Mon Sep 18, 2017 6:18 am
cpan00b wrote:...you said you wouldn't hold a bond in your taxable account. I figure if it's a tax exempt bond, it wouldn't be a problem. My 401k has pretty much nothing good except the 500 index.
A tax exempt bond in taxable is not a "problem", but it is not a good choice for your entire bond allocation in my opinion. Tax-exempt bonds are less diversified than a broad bond index fund and they carry somewhat more risk. And in the long run, you may make less money using only a tax-exempt bond. It is true they have done well in the recent low interest rate environment, but you cannot assume that will continue.

If you have no stable value fund in the 401k, I'd put at least half, maybe all, of my bond allocation in the Roth IRA. I might even use a 5% slice of that Doubleline Core bond fund in the 401k even though it is of lower quality than I usually prefer.

What VG bond fund do you prefer, if I were to put one into my roth?

I made some edits to my allocations and portfolio holdings over the last week. Right now I have:

Fund Name Amount % of Total
Taxable
VGTSX Vanguard Total International Stock $6,048 12%
VTSAX Vanguard Total Stock Market $17,406 35%
VWITX Intermediate term tax exempt bond fund $4,328 9%

Roth
VFFVX Vanguard Target Retirement 2055 $7,326 15%
VGTSX Vanguard Total International Stock $5,000 10%
VEXMX Vanguard Extended Market Index Fund Investor Shares $3,000 6%

401K
FXSIX 500 INDEX INST $6,615 13%


Total $49,723 100%

1. As I keep purchasing more FXSIX in my 401k, I will also add VEXMX so that they go up in a 75-25 ratio. This should emulate VTSAX.
2. As I keep buying more domestic stock due to the accumulations described above, I will keep transferring money from VFFVX to VGTSX in my roth. This way I will eventually exit the target retirement fund and transition my Roth account into all international stock in a pace that will keep my total stock allocation 70-30 for domestic v international
3. As my stock holdings go up, I figured I would slowly add to VWITX to maintain a 90-10 or 85-15 stock to bodn allocation.

I am willing to add a more balanced bond fund into my Roth, and get away from VWITX if necessary.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by retiredjg » Tue Sep 19, 2017 5:42 am

cpan00b wrote:
Mon Sep 18, 2017 8:50 pm
What VG bond fund do you prefer, if I were to put one into my roth?
My go-to bond fund is a Total Bond Index and it should be fine in the Roth IRA.

I made some edits to my allocations and portfolio holdings over the last week. Right now I have:

Fund Name Amount % of Total
Taxable
VGTSX Vanguard Total International Stock $6,048 12%
VTSAX Vanguard Total Stock Market $17,406 35%
VWITX Intermediate term tax exempt bond fund $4,328 9%

Roth
VFFVX Vanguard Target Retirement 2055 $7,326 15%
VGTSX Vanguard Total International Stock $5,000 10%
VEXMX Vanguard Extended Market Index Fund Investor Shares $3,000 6%

401K
FXSIX 500 INDEX INST $6,615 13%


Total $49,723 100%

1. As I keep purchasing more FXSIX in my 401k, I will also add VEXMX so that they go up in a 75-25 ratio. This should emulate VTSAX.
Yes.

2. As I keep buying more domestic stock due to the accumulations described above, I will keep transferring money from VFFVX to VGTSX in my roth. This way I will eventually exit the target retirement fund and transition my Roth account into all international stock in a pace that will keep my total stock allocation 70-30 for domestic v international
This works, but it places the same identical fund in taxable and Roth IRA. If you decide to tax loss harvest, this will present a wash sale conflict. You can avoid that by moving all the international into taxable as your contributions permit.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by cpan00b » Tue Sep 19, 2017 10:45 am

retiredjg wrote:
Tue Sep 19, 2017 5:42 am



This works, but it places the same identical fund in taxable and Roth IRA. If you decide to tax loss harvest, this will present a wash sale conflict. You can avoid that by moving all the international into taxable as your contributions permit.
Can you explain more? So if I exchange the international stock in my roth to something else, say a total bond fund, will that present a tax issue for me?
If so, once I have enough contributions, I can just hold the bonds in my Roth, while holding international + VtSAX in my taxable.

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Re: How to allocate between 401k with expensive fees + Vangaurd

Post by retiredjg » Wed Sep 20, 2017 11:38 am

cpan00b wrote:
Tue Sep 19, 2017 10:45 am
retiredjg wrote:
Tue Sep 19, 2017 5:42 am
This works, but it places the same identical fund in taxable and Roth IRA. If you decide to tax loss harvest, this will present a wash sale conflict. You can avoid that by moving all the international into taxable as your contributions permit.
Can you explain more?
https://www.bogleheads.org/wiki/Tax_loss_harvesting

Make sure you see the section on "wash sales" and also follow the wash sale link. If you do not intend to tax loss harvest, this may not be an issue that you want to worry about much (although you could do an accidental wash sale if you sold something in taxable at a wash).

So if I exchange the international stock in my roth to something else, say a total bond fund, will that present a tax issue for me?
No. You can buy and sell without triggering taxes in a Roth IRA, in a traditional IRA, or in your work plans like a 401k.

If so, once I have enough contributions, I can just hold the bonds in my Roth, while holding international + VtSAX in my taxable.
You can do that. Or hold 5% of your bonds in a tax-exempt bond fund in the taxable account and 5% of your bonds in Total Bond Index in the Roth IRA. Or even use some of the less desirable bond fund in your 401k.

You could even accomplish much of that now, all at one time. There is no need (although it does not hurt) to do it incrementally as you are considering. Here's an example of how you could set it up now based on your current portfolio account sizes:


Taxable 56%
21% VGTSX Vanguard Total International Stock
35% VTSAX Vanguard Total Stock Market


Roth 31%
14% 500 Index
7% VEXMX Vanguard Extended Market Index Fund Investor Shares
10% Total Bond Market Index


401K 13%
13% FXSIX 500 INDEX INST $6,615

If you did this, you will eventually need to save up at least $3k to start a new allocation to the tax-exempt bond fund in taxable. As the portfolio grows, if you don't buy more Total Bond in Roth for awhile, that 10% slice will drop down to a 5% slice leaving less of your Roth IRA encumbered by bonds (which some people like to avoid).

I suppose you could sell all but say $500 of the VWITX Intermediate term tax exempt bond fund in taxable and then just add to it as you can - avoiding having to come up with a $3k minimum again. That's probably what I'd do.

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