Bonds in multiple 401K efficiencies (ER analysis)

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cautiouscuriosity
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Bonds in multiple 401K efficiencies (ER analysis)

Post by cautiouscuriosity »

We have two 401ks, one for my wife and one for me.
We are both in mid-30s.

Mine is a TSP plan, where we are invested G fund 20%, C fund 72%, S fund 18%. All the expense ratios are tiny- .05% or less. The G fund is a government backed security that has 2-3% per year (historically). The C fund is basically the S&P 500. The S fund is a small value. There is also the F fund which replicates total US bonds (basically equating to VTBLX) but we are not currently invested. Also it has the I fund, where we are not invested because it essentially focuses only on Europe and Japanese markets.

My wife has a traditional commercial 401k which has an added 0.21 (net asset fee for all mutual funds) + 0.2 (net administrator fee). Here we are invested 60% VTIAX (total international) and 40% VTSAX (total US stock).

I want to diversify to add bonds (about 20%) to the entire 401k portfolio, but I'm not sure where to do it. I could put it in the TSP plan where the F fund essentially replicates VTBLX (total US bonds) and it would take the total percentages there to G fund 20%, F fund 20%, C fund 48%, S fund 12%. Or I could put it in the commercial 401K plan as VTBLX and the totals would go to 20% VTBLX, 55% VTIAX, 35% VTSAX. I'm not sure how the expense ratios should play into where I choose to place the aggregate bond fund.

Appreciate the advice!
mega317
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by mega317 »

Welcome.
If you're looking at expense ratios as a primary driver of where things go, you of course need to consider the expense ratios of all funds, not just the bonds.
I think, no personal experience, that the G fund is the best thing since/including sliced bread. Return of intermediate bonds with no risk. It's possible your entire bond portfolio should be that if it fits. Others will hopefully weigh in.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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retired@50
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by retired@50 »

cautiouscuriosity wrote: Fri May 13, 2022 8:57 am ...
My wife has a traditional commercial 401k which has an added 0.21 (net asset fee for all mutual funds) + 0.2 (net administrator fee). Here we are invested 60% VTIAX (total international) and 40% VTSAX (total US stock).
...
Appreciate the advice!
Welcome to the forum. :happy

mega317 raises some good points about the wonderful G fund in the TSP. No question, it's a unique fund that benefits TSP participants.

However, if the above additional fees are asset based, meaning that they are levied on every dollar in the wife's 401k plan, then you'd probably want this "expensive" account to grow more slowly, so that the fees levied would be lower. Therefore, you'd put ALL your bond funds in the expensive 401k plan. Slowing down the growth, and reducing the fees paid.

While these fees are not horrible, if she has any sway with company leadership, she may want to read the wiki page on how to campaign for a better 401k plan here: https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

Regards,
This is one person's opinion. Nothing more.
mega317
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by mega317 »

retired@50 wrote: Fri May 13, 2022 11:14 am However, if the above additional fees are asset based, meaning that they are levied on every dollar in the wife's 401k plan, then you'd probably want this "expensive" account to grow more slowly, so that the fees levied would be lower. Therefore, you'd put ALL your bond funds in the expensive 401k plan. Slowing down the growth, and reducing the fees paid.
This is a great point. Intuitively I'd think it's pretty close given the unique nature of the G fund and the not-horrendous 401k fees. It would interesting to see an analysis of this.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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cautiouscuriosity
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by cautiouscuriosity »

Thank you both! Can someone suggest how I can do this analysis. What’s a good free (or modestly priced) portfolio software where I can run these returns over time?

I think that I definitely want to hold onto some G fund (20% of combined 401k portfolio) given it’s unique advantages. But it seems like a fairly clear takeaway from your replies is that if I chose to add a total bond to the mix it would be best to do it in the commercial 401k with its higher asset fees.

I want to tabulate an analysis seeing if it would be worth it then to add bonds at all.
livesoft
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by livesoft »

When my spouse had a 401(k) with horrendous fees, it was best to invest it 100% in a bond fund AND to take out the maximum 401(k) loan in order to lower the dollar amount in the 401(k) and thus pay the lowest fees. The 401(k) loan was used to invest elsewhere tax-free with very low expense ratios.
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retired@50
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by retired@50 »

cautiouscuriosity wrote: Sat May 14, 2022 6:14 am Thank you both! Can someone suggest how I can do this analysis. What’s a good free (or modestly priced) portfolio software where I can run these returns over time?

I think that I definitely want to hold onto some G fund (20% of combined 401k portfolio) given it’s unique advantages. But it seems like a fairly clear takeaway from your replies is that if I chose to add a total bond to the mix it would be best to do it in the commercial 401k with its higher asset fees.

I want to tabulate an analysis seeing if it would be worth it then to add bonds at all.
A few thoughts on analysis...

I don't know if the G fund offers past performance data on the TSP website (assuming there is a TSP website) but that might be useful as a rough reference point as to how the fund behaves over time.

You haven't divulged to the forum the bond fund choices you have in the wife's expensive 401k plan. That would be useful too. You could then compare the performance of the two bond funds over time to see if, or how big, the advantage is for the G fund.

Further, you haven't divulged the dollar amount in the wife's 401k plan.

As an example to get you started thinking about how much, in dollars, the additional 41 basis points in fees (.21% + .20%) are costing your wife and other plan participants. If we assume a $100,000 balance in the 401k plan we get...
$100,000 * 0.0041 = $410 per year - for every year she's in the plan.

By putting the presumably faster growing assets (stock index funds) in her 401k plan, the likely outcome is that the 401k plan balance will grow faster, leading to higher fees paid.

You might be able to create a "break-even" point where the additional 41 basis points in fees are a higher annual dollar amount than the company 401k match (assuming there is a matching program in her plan).

Regards,
This is one person's opinion. Nothing more.
mega317
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by mega317 »

Another factor in the analysis is the G fund being risk-free makes it different from other bond funds and may enable you to adjust risk elsewhere, for example more stock in taxable if that’s relevant. Or max out a margin account to buy triple leveraged ETFs.

Jk on that last one.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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cautiouscuriosity
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by cautiouscuriosity »

Thanks everyone for your help!

We are a 2 income household. Both in our mid-30s. Highest tax bracket (but delayed earnings; truly didn’t start earning till 30, due to schooling).

1. Primary Home with 20% equity. No other debts, loans, or real estate aside from primary home.
2. I have a TSP (20% G, 64% C, 16% S; these all have very tiny expense ratios), there’s currently 120K in the TSP. The G fund yields about 2-3% per year but has no risk of loss as noted. https://www.tsp.gov/funds-individual/g-fund/

Wife has a 401K (currently 60% VTIAX, 40% VTSAX) with a 0.21+0.2 (0.41 total) net asset fee tacked on to the funds; there’s currently 92K. I think I want I add some bonds to the 401K as mentioned. The 401K has access to essentially all Vanguard funds with usual ER but then the tacked on .41% net asset fee. Maybe we are young enough that bonds matter less right now but I do want to have some (say around z10% split between TIPS and VTBLX). Both 401Ks are maxed

3. One family HSA and two individual Roth IRAs (all
At 70% VTI, 30% VXUS). Both maxed yearly. Pretty sure I did this right, except maybe can increase international exposure gradually.
4. Children- two of them: toddler and kindergarten. We’d like if they consider going to in-state college. Putting in about $500 per month, for each kid to their 529 plans on a moderate-growth schedule with Vanguard.
4. 3 months worth of take home salary in a MMA (emergency fund; about 50K). I-bonds 20k started this April.
5. Brokerage account (70% VTSAX, 30% VTIAX). Thinking of adding 10% VWITX (tax-exempt, intermediate municipal) and TIPS into the mix at a total of ~10%. Been contributing 25% of our take home income into this for the last 4 years (currently at 140K; after this years brutal start).
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retired@50
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by retired@50 »

cautiouscuriosity wrote: Sat May 14, 2022 11:27 pm 5. Brokerage account (70% VTSAX, 30% VTIAX). Thinking of adding 10% VWITX (tax-exempt, intermediate municipal) and TIPS into the mix at a total of ~10%. Been contributing 25% of our take home income into this for the last 4 years (currently at 140K; after this years brutal start).
TIPS aren't seen as a good choice in a taxable brokerage account, they are typically better in a tax-deferred 401k or IRA if you want to hold them.

See wiki page on tax efficient fund placement for more details. https://www.bogleheads.org/wiki/Tax-eff ... _placement

You may not benefit from using tax-exempt municipal bonds in the taxable account either, unless your income tax bracket is high enough or you live in a state with high income tax rates like NY or CA. I didn't notice your tax bracket or state of residence in your posts.

Given the G fund availability in the TSP, and the arguments mentioned earlier about using bond funds in her 401k, I don't see any need to hold bonds in your taxable account (unless you're in a really high tax bracket, and in a high income tax state, in which case, you'd consider a Vanguard municipal bond fund).

Regards,
This is one person's opinion. Nothing more.
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by grabiner »

retired@50 wrote: Fri May 13, 2022 11:14 am However, if the above additional fees are asset based, meaning that they are levied on every dollar in the wife's 401k plan, then you'd probably want this "expensive" account to grow more slowly, so that the fees levied would be lower. Therefore, you'd put ALL your bond funds in the expensive 401k plan. Slowing down the growth, and reducing the fees paid.
Actually, it doesn't quite work out this way. Suppose that her plan will lose 10% of its value to expenses over her career. If you invest $9000 in your plan and $10,000 in her plan today in the same funds, you will have the same final balances. Essentially, her account is 90% owned by her and 10% owned by the administrator, and you might consider it that way in your asset allocation.

A more common example of this phenomenon is the comparison between traditional and Roth. If you will retire in a 22% bracket, $10,000 in a traditional IRA and $7800 in a Roth IRA will have the same value if invested the same way. Putting stocks in the Roth still has a slight advantage, as if you put stocks in the traditional IRA, that might cause the account to become large enough to push you to a higher tax bracket. But that does not apply in your situation in which the administrator will take a fixed percentage.
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retired@50
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Re: Bonds in multiple 401K efficiencies (ER analysis)

Post by retired@50 »

grabiner wrote: Sun May 15, 2022 5:05 pm
retired@50 wrote: Fri May 13, 2022 11:14 am However, if the above additional fees are asset based, meaning that they are levied on every dollar in the wife's 401k plan, then you'd probably want this "expensive" account to grow more slowly, so that the fees levied would be lower. Therefore, you'd put ALL your bond funds in the expensive 401k plan. Slowing down the growth, and reducing the fees paid.
... Essentially, her account is 90% owned by her and 10% owned by the administrator...
Maybe it's me being petty, but I'd want to minimize the administrator's take in this scenario. :annoyed

This is precisely why I also linked the How to campaign for a better 401k plan wiki page in my first post in this thread.

Regards,
This is one person's opinion. Nothing more.
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