Author Topic: This is my current 401k plan at work. Do you recommend any changes?  (Read 2879 times)

xclonexclonex

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Hello everyone,

My employer contributes part of our bonus to a 401k plan at Fidelity. Currently, 100% of my contributions are to this particular fund -

Fidelity Freedom 2050 Fund (FFFHX)

Fund details -
http://i.imgur.com/UruQ64J.jpg

Fees -
http://imgur.com/g9NzxAV - Expense Ratio 0.78%

I have a couple of questions -

1. Is this a good fund?
2. Should I try to switch over to a fund with less expense ratio?

This is the fund with the lowest expense ratio -

Fidelity Freedom Income Fund (FFFAX)

Fund details -
http://i.imgur.com/qPPLkiF.jpg

Fees -
http://i.imgur.com/Etq3QFr.jpg - Expense 0.49%

Any advice is appreciated.

Thanks.
« Last Edit: March 18, 2015, 08:05:13 AM by xclonexclonex »

ioseftavi

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Re: This is my current 401k plan at work. Do you recommend any changes?
« Reply #1 on: March 18, 2015, 08:03:02 AM »
Fidelity Freedom Funds are age-based funds.  The number or description you see in the title tells you what the fund is for.  As a rule, age-based funds are more aggressive when you are young (up until about age 45) and then start to get less aggressive as you get closer to retirement - eventually levelling out at I think around a 50/50 stock bond split when you're close to retirement.

A "2050" fund is for someone who will be 65 (standard retirement age) around the year 2050.

The Freedom Income fund is for retired people who are drawing income.  The reason it is cheaper is because it is more heavily invested in bond funds, which are generally cheaper than stock funds.

Your expense ratio of 0.49% is fine.  You could do better if you had access to index funds and wanted to build your own portfolio, you could do that.  However, your expense ratio is not at the point where it's an enormous concern - you likely can't build an index portfolio in your 401(k) account, if the cheapest fund you're seeing is FFFAX.

xclonexclonex

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Re: This is my current 401k plan at work. Do you recommend any changes?
« Reply #2 on: March 18, 2015, 08:06:48 AM »
Thanks a lot for the reply.

I think you misunderstood the post a little bit. The expense ratio of the fund I am contributing to is 0.78%.

The lowest expense ratio of all the funds available to me is 0.49% which is the FFFAX fund. I was wondering if I should switch my contributions over to this fund.

Thanks!

ioseftavi

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Re: This is my current 401k plan at work. Do you recommend any changes?
« Reply #3 on: March 18, 2015, 08:18:52 AM »
Ah, I thought your first "fund facts" link that you had showed an expense ratio of 0.49% for the Freedom 2050 fund. 

0.78% isn't quite so hot - generally I try to keep all my accounts at an expense ratio of 0.5% or lower.  However, you've gotta work with what's available to you in your 401(k).  If the best fund(s) for your goals result in an expense ratio of 0.8% or whatever - so be it.

It sounds like you're focused heavily on expense ratios, which is generally a good thing.  However, picking the "cheapest fund" in your 401(k) is no good if it throws your asset allocation (mix of stocks and bonds) off wildly.  If you're not sure what I'm talking about, click the "composition" tab on the fund pages on Fidelity.com.  That will show the asset allocation of the funds we're discussing.

The Freedom Income fund (while cheaper) will put half your account in bonds.  If you're aiming to grow your money aggressively over the next few decades, you want to be heavily invested in stocks - probably 80% or more.  That's why the Freedom 2050 fund has over 90% in stocks: it's made for someone who has decades of investing ahead of them (and more time to endure bumps in the market).

For what it's worth - it's nice of you to use imgur to give screengrabs, but you can make your life easier in the future by just using 5-letter tickers on the MMM forums, or linking directly to the fund's webpage (Freedom 2050 Fund, Freedom Income Fund).  Everyone here will know how to go to morningstar or the fund page and grab the info!
« Last Edit: March 18, 2015, 08:20:29 AM by ioseftavi »

xclonexclonex

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Re: This is my current 401k plan at work. Do you recommend any changes?
« Reply #4 on: March 18, 2015, 09:43:48 AM »
Thank you very much for the information.

Judging by your reply, it seems like sticking to the current found would be the way to go. It seems like the expense ratio is high relatively speaking, especially when you compare to my fund with Vanguard, but this can't be helped I suppose. I don't have an option to move my 401k to Vanguard with my employer I don't think.

My question now is, if I were to find a different fund which invests in stocks just like FFFHX, but has a lower expense ratio, should I look to switch?

ioseftavi

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Re: This is my current 401k plan at work. Do you recommend any changes?
« Reply #5 on: March 18, 2015, 10:06:23 AM »
0.79% is relatively high for a mustachian portfolio - most people around these parts have overall portfolios with ERs of around 0.10 - 0.4%.  But 0.79% for a "normal person portfolio" is pretty good. 

Most investors in the US are walking around with junk drawer portfolios (no overall plan, no clue why certain things ended up in their accounts) with expenses of 1.2% or more, loaded funds, etc.  0.79% fees on a logically allocated, diversified portfolio, in a tax-advantaged account, is nothing to sneeze at. 

The reason I suggest you just kinda be "zen" about the 0.79% fees is it sounds like that's the best you can do in your current 401(k).  With 401(k) accounts, you don't have a choice of which investment firm to use: you've gotta go with whoever your employer picked.  If that's Vanguard, great!  If it's Morgan Stanley or someone more expensive, welp, it is what it is.  Do the best you can with the choices you've got in that account.  Even with fees a bit higher than you'd like, the employer match, high pre-tax contribution limits, and tax-deferral that 401(k) accounts offer still make them the best "first line of savings" for most mustachians.

My question now is, if I were to find a different fund which invests in stocks just like FFFHX, but has a lower expense ratio, should I look to switch?

Yes, but this is unlikely.  Keep your eyes peeled - if your 401(k) plan adds a bunch of index funds, the odds are good you can clone the FFFHX portfolio allocation for about half the cost.  Until you hear your company saying they're adding a bunch of index funds to the menu, you are likely positioned as well as you can be.

Remember that when you leave your employer, this all changes. 

Once the 401(k) company gets word that you're no longer working at the company (usually a month or a quarter after you leave), you can 'rollover' your old 401k to a Rollover IRA, where you can choose nearly anything to invest in.  If you roll to a company like Vanguard, you can choose the Vanguard equivalent of the target-date fund you were using, VFIFX.  That has an expense ratio of 0.18%.  Alternately, if you're itching to self-allocate, you can choose a mix of index funds that add up to the asset allocation you want.
« Last Edit: March 18, 2015, 10:08:48 AM by ioseftavi »