roll my own target date fund to save cost?

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memoryleokk
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roll my own target date fund to save cost?

Post by memoryleokk »

I have a relatively new 401(k) in Fidelity containing less than 5% of our portfolio. I will continue to max it every year along with a small employer match. The 401(k) is currently invested in this 2040 target date trust: T. Rowe Price Retirement 2040 Trust Class F (0.37% expense ratio).

As the account grows, the expense will soon cost more than our other accounts which are much larger in size. For reference, our other tax-deferred retirement accounts are in Vanguard target funds/trusts which have 0.08% expense ratio or lower.

Looking at the menu of funds available in the 401(k), I could roll my own target date fund with:
  • FSKAX - Total U.S. Stock Index Fund
  • FSPSX - International Stock Index Fund
  • FXNAX - U.S. Bond Index Fund
  • The 401(k) does NOT offer FBIIX (int'l bonds) so I could not exactly mirror Vanguard's target fund allocation, I would sub in more FXNAX instead
  • T. Rowe target funds seem to have a more aggressive AA than Vanguard as well as proportionally less international equities, so would need to decide which specific target fund I want to mirror and allocate accordingly
I think the considerations for making a change are:
  1. How much is it worth to me to have the AA/re-balancing/fund selection handled for me by financial professionals?
  2. Do I see significant advantages in taking on more fine-grained control of this account?
Given that this 401(k) represents less than 5% of our portfolio, my conclusion is to stay the course and reevaluate when the account hits some threshold (e.g., 10% of our portfolio). Anything I'm missing in this chain of reasoning?
jebmke
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Re: roll my own target date fund to save cost?

Post by jebmke »

I think that is reasonable. For a large amount, I'd definitely unbundle and use fairly wide re-balance rules to avoid having to monitor it too much
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retiredjg
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Re: roll my own target date fund to save cost?

Post by retiredjg »

For 5% of your portfolio, I'd just use one fund - either US stocks or bonds, depending on what you need there more. Splitting 5% of your portfolio into several funds is work with no reward.
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skipper
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Re: roll my own target date fund to save cost?

Post by skipper »

Why not make it 100% FSKAX and leave it alone? It's such a small portion of your total portfolio, I can't imagine needing any more granularity in a bucketed or mirrored portfolio.
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Jeepergeo
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Re: roll my own target date fund to save cost?

Post by Jeepergeo »

If it were me, I'd build my own target date fund from the lowest cost funds offered by the 401k plan that mimic elements of the TRP target date funds. If you are missing an element in the low cost options, just make up that element in your other tax deferred plans. In many 401k plans, there are tools to very easily reallocate into and out of funds simply by inputting percentages. In my 401k, the portfolio can be reallocated in a minute or two.

Going from 0.38% to potentially under 0.10% in fees will save you a bunch over a career.

Check out this article on fees:
https://web.archive.org/web/20161110064 ... f-returns/

Also watch out for 401k plan "administration" fees and "advisory" fees, which are likely unavoidable. Some companies pick up these fees, others don't. My employer pays the "administration" fee, but participants pay the "advisory" fee which is 0.25% for the plan. The irony of the "advisory" fee is that I'd never take any advice from the plan rep...he is evasive condescending, and during presentations, has been misleading at best and downright lying at worst.

The only reason I keep money in the plan is because it has ERSIA anti-alienation protections whereas my state (CA) does not have decent protections for rollover IRAs.
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Watty
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Re: roll my own target date fund to save cost?

Post by Watty »

You are basically describing what I did before I retired when my 401k did not have a good low cost target date fund. It is called a three fund portfolio which can also allow you to hold your funds in the most tax efficient account, for example you typical want to avoid holding bonds in a taxable account because if the way that interest is taxed.

https://www.bogleheads.org/wiki/Three-fund_portfolio

One of the key things is that you want to look at all your accounts combined. If you have a lot of money in taxable accounts you might want your entire 401k to be in a bond mutual fund.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
bonesly
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Re: roll my own target date fund to save cost?

Post by bonesly »

memoryleokk wrote: Sun Feb 02, 2025 11:18 am Given that this 401(k) represents less than 5% of our portfolio, my conclusion is to stay the course and reevaluate when the account hits some threshold (e.g., 10% of our portfolio). Anything I'm missing in this chain of reasoning?
I would not stay the course on a moderately-high cost TDF when it's only 5% of your total portfolio; you should likely dump the entire balance into a single low-cost pure stock fund (either US or int'l but not a split). I entirely agree with @retiredjg that splitting up one account that's only 5% of total is lots of work for no reward. You should assess all accounts as a whole portfolio and then try to minimize the number of funds across accounts rather than mirroring your asset allocation in each account (as that tends to lead to tiny slices with duplication which is clutter, not diversification).

As an example of a Current portfolio balance of $1M split among 80/20 with 40% of stocks in int'l (much like a far-off TDF or Van's LifeStrategy Growth) that has a "New Trad 401k" that is only 5% of the total ($50K). The AA is Mirrored in every account, which can lead to bonds in Taxable and Roth (which is contrary to Tax-Efficient Fund Placement) as well as holding "substantially identical" funds (in IRS lingo) in Taxable and IRAs opens you up to issues with Wash Sales. Plus there's the clutter of splitting up the New 401k into three components when it's so tiny to begin with leading to a 12 holdings (more than necessary).

Contrast that with a holistic rebalance across all accounts in the Proposed portfolio which eliminates the wash sale and tax-inefficiencies as well as the clutter reducing holdings from 12 down to 6 (half as many funds to still meets the AA; fewer is better).

"Simplicity is the master key to financial success." -- John C. Bogle

Image

A template spreadsheet to help with asset allocation assessment and rebalance planning is linked below. Make a copy in your local GoogleSheets space to edit (or download to your local machine if you have Excel).
Asset Allocation Sheet
AA Current and Proposed
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
bombcar
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Re: roll my own target date fund to save cost?

Post by bombcar »

At 5% I’d pick one fund and use it for all, adjusting elsewhere if needed. You can always reevaluate later.

(The main reason to roll your own with target date is to adjust what they assume, but that can be done by changing the year).
delamer
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Re: roll my own target date fund to save cost?

Post by delamer »

Note also that the TDF is an actively managed fund, while your other options are index funds.

I agree with earlier suggestions of picking one of the index funds, consistent with your desired overall retirement portfolio allocation, and putting everything in it. You can easily rebalance later as the account grows.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
memoryleokk
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Re: roll my own target date fund to save cost?

Post by memoryleokk »

Jeepergeo wrote: Sun Feb 02, 2025 11:43 am Going from 0.38% to potentially under 0.10% in fees will save you a bunch over a career.

Check out this article on fees:
https://web.archive.org/web/20161110064 ... f-returns/
bonesly wrote: Sun Feb 02, 2025 3:49 pm I would not stay the course on a moderately-high cost TDF when it's only 5% of your total portfolio; you should likely dump the entire balance into a single low-cost pure stock fund (either US or int'l but not a split). I entirely agree with @retiredjg that splitting up one account that's only 5% of total is lots of work for no reward. You should assess all accounts as a whole portfolio and then try to minimize the number of funds across accounts rather than mirroring your asset allocation in each account (as that tends to lead to tiny slices with duplication which is clutter, not diversification).
Many thanks to you and the other posters for such thoughtful responses! I will take a step back and think through your holistic approach which certainly sounds more straightforward and fee/time efficient.
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steve r
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Re: roll my own target date fund to save cost?

Post by steve r »

skipper wrote: Sun Feb 02, 2025 11:40 am Why not make it 100% FSKAX and leave it alone? It's such a small portion of your total portfolio, I can't imagine needing any more granularity in a bucketed or mirrored portfolio.
+1
If this is too much risk, you could always down shift five years in one of your Vanguard funds (effectively adding bonds).

As long as your are working, being 100% is OK with a small percentage fund.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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