creating low cost AA from 401k choices

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e916mt
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Joined: Mon Oct 09, 2017 9:10 am

creating low cost AA from 401k choices

Post by e916mt » Mon Oct 09, 2017 7:04 pm

Basic

Emergency funds: $35K cash
Debt: $500K mortgage balance @ 3.75%
Tax Filing Status: Married filing jointly
State of Residence: PA
Age: He 49 She 41
Desired Asset Allocation: 70% stocks / 30% bonds
Desired International allocation: 0% (don’t know enough to mess with it)

Current retirement assets -- approx $700K

His 401k former employer
48% FID 500 INDEX INST(0.03%) (FXSIX)
12% FID EXT MKR IDX PR (0.07%) (FSEVX)
20% FID US BOND IDX PR (0.045%) (FSITX)

His 401k current employer (new job, a few months)
2% Target Retirement Vanguard 2035 Inv (0.15%) (VTTHX)

Her IRA (rollover)
3% Vanguard Target Retirement 2040 Fund (0.16%) (VFORX)

Her 401K current employer
15% TRP Retirement 2050 (0.76%) (TRRMX) ←- 0.76%!


Contributions

-- $560/month to his 401k + $374 employer contribution = $934/month (must contribute min $374/m so we get the match)

-- $964/month to her 401k + $541 employer match = $1505/month (must contribute min $541/m so we get the match)

Available Funds

Funds in his 401k former employer

Large Cap
AF GRTH FUND AMER R6 (0.33%) (RGAGX)
DODGE & COX STOCK (0.52%) (DODGX)
FID 500 INDEX INST (0.03%) (FXSIX)
FID CONTRAFUND K (0.58%) (FCNKX)

Mid Cap
FID EXT MKT IDX PR (0.07%) (FSEVX)
JH DSCPL VAL MDCP R6 (0.77%) (JVMRX)
TRP MID CAP GROWTH (0.77%) (RPMGX)

Small Cap
FID SMALL CAP VALUE (0.99%) (FCPVX)
TRP NEW HORIZONS (0.79%) (PRNHX)

Intl
FID DIVERSIFIED INTL K (0.92%) (FDIKX)
VANG TOTAL INTL STOCK IS (0.09%) (VTSNX)

Specialty
FID REAL ESTATE INVS (0.76%) (FRESX)

Blended
OAKMARK EQ & INC INV (0.89%) (OAKBX)
TRP RETIRE (20XX) 0.43%

Bond
FID US BOND IDX PR (0.045%) (FSITX)
METWEST TOT RTN BD P (0.38%) (MWTSX)
PIMCO INCOME INST (0.48%) (PIMIX)
TRP HIGH YEILD INST (0.50%) (TRHYX)
VANG ST BOND IDX IS (0.05%) (VBITX)
VANG TL INTL BD IDX AD (0.12%) (VTABX)
VANG INFL PROT INST 0.07% (VIPIX)

Short-Term
FID TREASURY ONLY MM 0.42% (FDLXX)

Funds in his current 401k

Short Bonds
Wells Fargo Stable Return E (0.46%) (N/A)

Interm/Long-Term Bonds
Loomis Sayles Core Plus Bond N (0.39%) (NERNX)
Vanguard Total Bond Market Index Adm (0.05%) (VBTLX)

Large Cap
MFS Value R6 (0.51%) (MEIKX)
Northern Trust S&P500 Index NL Tier 1 (0.04%) (N/A)
MainStay Large Cap Growth R6 (0.62%) (MLRSX)

Small/Mid-Cap
JHancock Disciplined Value Mid Cap R6 (0.77%) (JVMRX)
Vanguard Mid Cap Index Adm (0.06%) (VIMAX)
Janus Henderson Enterprise N (0.68%) (JDMNX)
American Beacon Small Cp Cal Inst (0.84%) (AVFIX)
Vanguard Small Cap Index Adm (0.06%) (VSMAX)
ClearBridge Small Cap Growth IS (0.78%) (LMOIX)

Intl
Artisan International Instl (0.95%) (APHIX)
Vanguard Total Intl Stock Index Adm (0.11%) (VTIAX)

Other
TRP Capital Appreciation I (0.60%) (TRAIX)
Vanguard Target Retirement 20XX Inv (0.16%) (Various)


Funds in her current 401k

Bonds
Metropolitan West Total Return Bond M (0.67%) (MWTRX)
JPMorgan Government Bond I (0.48%) (HLGAX)
BlackRock High Yield Bond Inv A (0.94%) (BHYAX)

Large Cap
Invesco Diversified Dividend A (0.84%) (LCEAX)
Vanguard Value Index Adm (0.06%) (VVIAX)
Vanguard Institutional Index I (0.04%) (VINIX)
TRP Blue Chip Growth (0.72%) (TRBCX)
Vanguard Growth Index Adm (0.06%) (VIGAX)

Small/Mid
Vanguard Mid-Cap Value Index Arm (0.07%) (VMVAX)
JHancock Disciplined Value Mid Cap I (0.86%) (JVMIX)
Vanguard Mid Cap Index I (0.05%) (VMCIX)
Vanguard Mid-Cap Growth Index Admiral (0.07%) (VMGMX)
Voya MidCap Opportunities I (0.98%) (NMCIX)
JPMorgan Small Cap Value I (1.00%) (PSOPX)
Vanguard Small Cap Value Index Admiral (0.07%) (VSIAX)
Vanguard Small Cap Index I (0.05%) (VSCIX)
Janus Henderson Triton I (0.78%) (JSMGX)
Vanguard Small Cap Growth Index Admiral (0.07%) (VSGAX)
PIMCO Real Estate Real Return Strategy I (0.74%) (PRRSX)

Intl
America Funds EuroPacific Gr R5 (0.54%) (RERFX)
Franklin Intl Small Cap Growth Adv (1.14%) (FKSCX)

Blended
TRP Retirement 20XX (0.76%) (Various)

Questions

Quite a learning experience to pull all this together. “Funny” to see the target dates are all over the place. Surprised the expenses for the TRP Retirement funds in her 401k are so high. Saw some of the target funds had large non-us holdings. Lots of interesting stuff.

1. What can we do to achieve an optimum 70/30 portfolio? (I.e. making changes within accounts).

2. Going forward, how should we optimize contributions to our 401(k)’s? By this I mean of the total contribution, how much should go into hers and how much into his, and which funds within each. Of course we can’t go below the minimums to get the full match.

3. Do you think it is possible to reduce retirement contributions and still be ok? I ask because we have not been good non-retirement savers and I would like to direct more funds to non-retirements savings. I am wondering if this can come out of the 401(k) contributions. Just started $1K a month to non-retirement, non-college.

THANK YOU!
Last edited by e916mt on Tue Oct 10, 2017 5:45 pm, edited 2 times in total.

Spirit Rider
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Re: creating low cost AA from 401k choices

Post by Spirit Rider » Mon Oct 09, 2017 7:51 pm

e916mt wrote:
Mon Oct 09, 2017 7:04 pm
I can see "Vanguard Institutional Index I" as the equity portion. The bond options seem very limited.
The Vanguard Institutional Index is a S&P 500 fund
Vanguard Institutional Index I (0.04%)

The Vanguard Mid Cap and Small Cap can be used to create a Total Market. I do not remember the percentages, but I'm sure someone does.
Vanguard Mid Cap Index I (0.05%)
Vanguard Small Cap Index I (0.05%)

She doesn't have a great bond option
JPMorgan Government Bond I (0.48%)

She could use any previous employer plans and/or IRAs to for the bond component. Otherwise, the .48% isn't that horrible until she can get IRA space for low cost index funds.

P.S. I just noticed that I didn't mention the good international index fund you had in your 401k.
VANG TOTAL INTL STOCK IS 0.09%

Target date funds usually have an international component to the allocation. It is a personal decision if and what percentage you want for an international allocation.

She has no good international options. They are sector funds and you can't even create a complete effective international market.
Last edited by Spirit Rider on Mon Oct 09, 2017 8:04 pm, edited 1 time in total.

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grabiner
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Re: creating low cost AA from 401k choices

Post by grabiner » Mon Oct 09, 2017 8:04 pm

It makes sense to view everything as one allocation. She could put this entire 401(k) in Vanguard's institutional and small-cap indexes, then hold bonds in her IRA, and international stock in your 401(k) or IRA so that the overall allocation comes out to what you want.
David Grabiner

Tamarind
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Re: creating low cost AA from 401k choices

Post by Tamarind » Tue Oct 10, 2017 6:09 am

Yes, the correct allocation for this account depends somewhat on how much space she has elsewhere. She actually has fantastic US stock fund choices.

81% VG institutional index
4% VG mid cap index
15% VG small cap index

...will replicate the Total Stock Market index fund at a very low cost.

But it would be better if she could fit her international and bonds elsewhere.

I find it helpful to think in terms of what each account represents as a % of total investible assets, and what contributions to each amount to as % of total annual contributions. You can write it down in a small table. . Combined with your desired AA, this will help you figure out asset location pretty quickly.

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ruralavalon
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Re: creating low cost AA from 401k choices

Post by ruralavalon » Tue Oct 10, 2017 7:32 am

It's often better to treat all of a couple's accounts together as a single unified portfolio. In other words coordinate the investments in her 401k, your 401k, your old 401k, any IRAs you and she have, and any other investing accounts.

That way you can use only the best funds in each account, and don't have to settle for second-rate funds in any account. Select funds for a good combination of broad diversification (to decrease your risk) and low expense ratios (to increase your net return). In her 401k the best fund is Vanguard Institutional Index Fund (a S&P 500 index fund) (VINIX) ER 0.04%.

I would help if you posted details about all of the accounts in a single post, giving fund names, tickers and expense ratios for the funds in each account, and for the funds offered in each work-based account.

Please see the post "asking portfolio questions" for format. You could simply add to your original post using the edit button, so that all of your information is in one place.
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e916mt
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Joined: Mon Oct 09, 2017 9:10 am

Re: creating low cost AA from 401k choices

Post by e916mt » Tue Oct 10, 2017 5:26 pm

Perfect, I hadn't thought in terms of the overall portfolio. Oops. I have edited my initial post to provide additional information. I hope it's clear.

:moneybag

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ruralavalon
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Re: creating low cost AA from 401k choices

Post by ruralavalon » Wed Oct 11, 2017 6:14 am

The new information will be very useful in giving you some suggestions. Both your old 401k and your current 401k offer some very good funds to use, with very low expense ratios.

Will your current 401k accept a rollover from your old 401k? Some plans allow that. If so, then a rollover of your old 401k into your current 401k would be a way to simplify your portfolio.

Do you have a particular non-retirement goal that you wish to save for?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

livesoft
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Re: creating low cost AA from 401k choices

Post by livesoft » Wed Oct 11, 2017 6:41 am

Although he is 49 today, if he is 50 by year end, then his 401(k) contribution limit is $24,000 annually. So for 2018, he will surely be able to contribute $24,000 to his 401(k) if he wants to. And all that doesn't include employer contribution.
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e916mt
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Re: creating low cost AA from 401k choices

Post by e916mt » Wed Oct 11, 2017 9:38 am

Hi!

- Yes, my new 401k will accept a rollover from my previous plan.
- Non-retirement savings goals: i) new roof (5-10 years I think), ii) travel/vacation, iii) home renovation.

Best!

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ruralavalon
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Re: creating low cost AA from 401k choices

Post by ruralavalon » Wed Oct 11, 2017 12:12 pm

Asset allocation.
e916mt wrote:Age: He 49 She 41
Desired Asset Allocation: 70% stocks / 30% bonds
Desired International allocation: 0% (don’t know enough to mess with it)
In my opinion an asset allocation of 70/30 is within the range of what is reasonable at ages 41 and 49.

I suggest around 20-30% of stocks in international stocks. Historically that would have captured between 84-99% of the maximum diversification benefit. For a pdf of a Vanguard paper on the subject Google "Considerations for Investing in Non-U.S Equities".

That works out to about 30% bonds, 15-20% international stocks, and 50-55% domestic stocks. Asset allocation is a very personal decision which you must make based on your own ability, willingness and need to take risk.


Accounts and contributions.
I suggest that you roll his old 401k over into his current 401k. Both plans offer very good funds with very low expense ratios. The Fidelity funds in the old 401k have expense ratios just five thousandths of a percent lower than the Northern Trust and Vanguard funds in the new 401k, not enough difference to matter, and combining the two accounts makes your portfolio simpler.

At the current arrangement of contributions about 62% of new annual contributions go to her 401k, whereas the only low ER index funds in that account are domestic stock funds, which are to be 50-55% of the portfolio. His 401k offers a better selection of low ER index funds, including for domestic stocks, international stocks, and bonds. It might be a good idea in the future to increase contributions to his 401k, so that you can continue to use only the best low ER index funds offered.

The maximum employee contribution to a 401k is $18k per year, $24k if age 50 or more. I encourage you to make the 401k contributions as high as practical for you.

In general it's better to make the maximum contributions to all tax-advantaged accounts before contributing to a taxable account. Please see the wiki article "prioritizing investments". But it is appropriate to use a taxable account to accumulate money for such uses as home maintenance or repairs, and vacations.


Fund selection.
In selecting funds strive for a good combination of broad diversification (to decrease your risk) and low expense ratios (to increase your net returns). To achieve those two goals I suggest using a three fund type portfolio. Please see the wiki article "three-fund portfolio" and the forum discussion "the three-fund portfolio".

Domestic stocks. I suggest using a total stock market index fund if available, otherwise an S&P 500 index fund (such as Vanguard Institutional Index Fund, or Northern Trust S&P 500) is good enough for domestic stocks. An S&P 500 index fund covers 81% of the domestic stock market, and in the 25 years since the creation of the first total stock market index fund the two types of fund have had almost identical performance. So it appears that adding some small-cap and more mid-cap stocks trying to mimic the content of a total stock market index fund has historically added little in performance.

If you want to add some small-cap and more mid-cap stocks then an 82/18 mix of the S&P 500/small-cap funds will approximate the content of a total stock market index fund. Please see the wiki article "approximating total stock market".

International stocks. I suggest using Vanguard Total Stock Index Fund Admiral Shares (VTIAX) ER 0.11% in his 401k. The fund is very diversified, covering both larger and smaller companies, in both emerging and developed markets including Canada.

American Funds EuroPacific Growth Fund R6 (RERGX) ER 0.54% in her 401k is a good actively managed international stock fund, covering only larger companies in developed and emerging markets, with a moderate expense ratio. It's an acceptable actively managed fund to use, if in the future there is no longer enough room to use the more diversified less expensive Vanguard international fund in his 401k.

Bonds. I suggest using Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05% I. his 401k. That fund uses the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index, the most diversified index of U.S. bonds. It covers both government and corporate bonds. So it is more diversified and has a lower expense ratio than the actively managed government bond fund in her 401k.

It's usually good to have one large account which includes all three basic asset classes. This makes it easy to manage and rebalance your portfolio.


Example portfolio.
Here is an example portfolio that you could consider. Total current portfolio= about $700k. New annual contributions = about $29.3k. The asset allocation is about 30% bonds, 15-20% international stocks, and 50-55% domestic stocks. The percentages given are percentages of the total portfolio, not percentages of any particular account. Sometimes I state 00% to indicate funds that are optional, or funds you might want to add in the future.

His current 401k, includes rollover of his old 401k (82% of portfolio; adds $6.7k/yr + $4.5k/yr employer match = $11.2k total = 38% of new annual contributions)
32%, Northern Trust S&P 500 index NL, ER 0.04%
00%, Vanguard Small-cap Index Fund Admiral Shares (VSMAX) ER 0.06% (optional)
20%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%
30%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

Her rollover IRA @ Vanguard (03% of portfolio)
03%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%

Her current 401K (15% of portfolio; adds $11.6k/yr + $6.5k/yr employer match = $18.1k/yr total = 62% of new annual contributions)
15%, Vanguard Institutional Index Fund (a S&P 500 index fund) (VINIX) ER 0.04%
00%, Vanguard Small-cap Index Fund Institutional (VSCIX) ER 0.05% (optional)
00%, American Funds EuroPacific Growth Fund R6 (RERGX) ER 0.54%
00%, JP Morgan Government Bond Fund ER (HLGAX) 0.48%


Rebalancing.
The funds will grow at different and unpredictable rates. Once every year or two you may need to rebalance to adhere to your desired asset allocation. Please see the wiki article "Rebalancing". You can easily rebalance simply by exchanging between funds inside his current 401k.

. . . . .

I suggest that you read one or two books on general investing. Please see the wiki article "books: recommendations and reviews".

If you have any questions just ask.

I hope that this helps.

e916mt
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Joined: Mon Oct 09, 2017 9:10 am

Re: creating low cost AA from 401k choices

Post by e916mt » Wed Oct 11, 2017 4:19 pm

Many many thanks for your incredibly comprehensive reply. I've gone through the wiki entries and Vanguard paper. (I would have missed the international equity component entirely.)

I feel confident in terms of the overall strategy: consolidating the 401k's, the overall asset allocation (including intl), and how to work the contributions and allocations within the funds to make the most out of the funds in each 401k.

The example portfolios are extremely helpful. Brilliant.

One question I want to work through is to take another look at the aggregate amount we contribute to the 401k. There is not a lot of thought behind the annual contribution, not based on what is needed to reach a goal, and we haven't really had a good budget. This is a separate subject.

This helps very much. Thank you.

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