Author Topic: 401K Asset Allocation help  (Read 1459 times)

brandon1827

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401K Asset Allocation help
« on: January 17, 2019, 12:51:30 PM »
I've been putting money into my 401K for a number of years and just recently took a break to focus on paying down current debt, before ultimately re-starting contributions to the 401K at some point in the near future. My company offers a 50% match up to 6% of base compensation, and we are provided a tool for monitoring fund performance as well as reallocating current shares or future shares to different vehicles.

As of yesterday, my balance is $94,382.17. My current allocation is:

12.74% - Short Term Bond Fund
31.60% - Value Stock Fund
13.86% - Small Company Stock Fund
23.60% - International Stock Fund
13.33% - Diversified Growth Stock Fund
4.88%   - 2040 Target Date Portfolio

My personal rate of return has been:

Last Quarter: -12.39%
1 Year: -9.31%
3 Year:  6.68%
5 Year:  5.46%
10 Year: 8.07%

I understand that markets will swing up and down, so I'm not terribly concerned with the recent performance. I'm more looking for advice regarding where I should possibly be reallocating these to moving forward. I've just discovered mustachianism, so I'm a little late to the game...but I've been reading as much as I can regarding how to get myself to early retirement. I'm 43 now, and in addition to the 401K, I have a company-funded retirement security (pension) plan, that has a current cash value of $330,000. I also have 60-acres of land that could net somewhere in the ballpark of $600,000 were I to (need to) sell it. I have a bit of debt that I plan to take care of in the next 18-24 months, but after that, it will be all saving all the time. I didn't want to post this in case-studies...because I don't need any further advice on tackling debt or reducing expenses...but investing is my weak spot, so I really would like some feedback on where to put this $94,000 in order to make it work for me in the best way possible. We can change our current or future allocations in this 401K utilizing an online portal, and by keying a percentage figure into different fields as outlined below: (Expense Ratios in bold)

Stable Income Fund (.37%)
Short-Term Bond Fund (.35%)
Value Stock Fund (.35%)
S&P 500 Stock Index Fund (.28%)
Small Company Stock Fund (.32%)
International Stock Fund (.76%)
Diversified Growth Stock Fund (.60%)
2020 (.33%), 2030 (.33%), 2040 (.34%), etc. Target Date Portfolios

Once the desired percentage is keyed into the appropriate fields, I submit it and someone changes the allocations of my existing funds and/or future allocations. I can drill down and get a listing of holdings for each fund if that helps...but I appreciate any advice any of you may be willing to share.

Thanks!
« Last Edit: January 17, 2019, 01:48:59 PM by brandon1827 »

ysette9

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Re: 401K Asset Allocation help
« Reply #1 on: January 17, 2019, 01:28:59 PM »
The expense ratios of these funds are crucial to include if you want any decent advice.

Also, what is the interest rate on the debt you are laying down? You may be better off putting enough in the 401k to at least get the match (Free Money!) and then use remaining funds to pay down debt.

brandon1827

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Re: 401K Asset Allocation help
« Reply #2 on: January 17, 2019, 02:10:53 PM »
I added the expense ratios for each fund.

I can also detail each particular funds holdings if that would be helpful.

ysette9

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Re: 401K Asset Allocation help
« Reply #3 on: January 17, 2019, 08:55:21 PM »
If it were me I’d go with the S&P 500 fund as it is reasonably diversified and has the lowest fees. The target date funds aren’t bad choices though as they will be a one-stop shopping trip and aren’t too expensive.

If you have an idea of what stock/bond ratio you would like to hit then look into the target date funds and pick the year that has the mix closest to your target.

appleshampooid

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Re: 401K Asset Allocation help
« Reply #4 on: January 18, 2019, 07:59:13 AM »
Oof. I'm sorry to say that your options are pretty bleak in terms of expense ratios. How can an S&P 500 index fund have a 0.28% expense ratio? Like how is that even possible? Here are some common S&P 500 index funds out there, available to individual investors:
VFIAX (vanguard) 0.04%
SWPPX (Schwab) 0.03%
FXAIX (Fidelity) 0.02%
Not to mention that inside a 401(k), many fund companies offer even better ratios due to the larger combined balances.

Not throwing any shade at you, personally, obviously you don't have any choices. But if your company is small to medium, or you know anyone in HR/Payroll, it may be worth reaching out to them to see if they can add any Vanguard or other low-cost funds to your plan.

brandon1827

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Re: 401K Asset Allocation help
« Reply #5 on: January 18, 2019, 10:18:17 AM »
My company alone is relatively small, with approximately 250 employees. I work at an electric cooperative though, so we are essentially put in a much larger group along with hundreds of other electric cooperatives where all of our resources are pooled for the 401K and pension funds. I could make suggestions to my company's HR about the expense ratios, but ultimately to see any change it would have to get through a much larger body of people. I say all of that to say that I don't think there is much chance for change there because there is so much money tied up in the funds as currently constituted. I don't know how (if at all) the asset mix in each portfolio affects the stated expense ratio...
« Last Edit: January 18, 2019, 02:04:58 PM by brandon1827 »

ysette9

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Re: 401K Asset Allocation help
« Reply #6 on: January 18, 2019, 11:07:53 AM »
The S&P 500 index fund is about the most common, most popular, most vanilla/commodity index fund you can find. There is absolutely no reason whatsoever that the expense fund should be that high. I think it is just indicative of the quality of your plan overall.

As others have said, that is no reflection on you at all, and you can only make the best decisions you can with what they have offers you. Do mention that the fees are high and you would like to see lower cost options if you are ever in the position to do so.

MustacheAndaHalf

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Re: 401K Asset Allocation help
« Reply #7 on: January 18, 2019, 11:55:50 AM »
Those fees aren't ideal, but you have several options below 0.50% expense ratios.
Actually, there's a bit of a loophole here.  What happens if you put everything in a target date fund?

Currently you'd pay 0.76% for international investments.  But every target date fund I've seen holds 20-40% international equities.  They typically hold 10% bonds for someone far from retirement.  So I'd go 100% into the target date fund.  You'll get the U.S. stock market, international, and bonds for a fee rivaling the lowest fees in your plan.

brandon1827

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Re: 401K Asset Allocation help
« Reply #8 on: January 18, 2019, 02:03:57 PM »
Thanks for the advice everyone. We have an annual visit from a financial expert to discuss fund performance and the different portfolios available. I will most definitely bring up the expense ratios the next time he's here and see if I can get a straight answer on why they're so high.

I can't see the company breakdown in the target date portfolio, but it does clearly state in the profile that it holds international stocks. The current asset mix shows 28% international stocks, so there is definitely a loophole of sorts in that fund.

appleshampooid

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Re: 401K Asset Allocation help
« Reply #9 on: January 18, 2019, 02:26:59 PM »
Back to the original question, with those options, dumping 100% into the appropriate target date fund is a reasonable choice. It depends on what other investments you have, and how detailed you are with your asset allocations. For example, I try to hold all my international stocks in taxable accounts, so I can benefit from the foreign tax credit, so I wouldn't hold international stocks in this account. But you may not be getting that complicated yet.

If you don't go with one of the target date funds, I would just choose your bond percentage, and split it between the S&P500 fund and the bond fund. I wouldn't touch that international fund given its expense ratio.

brandon1827

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Re: 401K Asset Allocation help
« Reply #10 on: January 21, 2019, 09:56:47 AM »
My outlook to this point has been that because I'm still young(ish), I could tolerate more risk in hopes of higher returns over the long-term. Now that I've discovered MMM and have changed my entire outlook on life and retirement, I'm wondering if I shouldn't be a little safer with the 401K considering that I hope to retire potentially 7-10 years earlier than I'd previously thought possible. I know the target-date portfolio would be easy...and the risk seems moderate, so I guess I just have to determine which target-date fund to put money into. I think I may do what appleshampooid suggested and split it between the S&P fund and maybe the 2030 target-date portfolio. Thanks again for all the help

ysette9

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Re: 401K Asset Allocation help
« Reply #11 on: January 21, 2019, 06:02:16 PM »
Even if you are retiring early you are still investing for the next 50-60 years, which means a heavy portion of stock in your portfolio is important for it to make the distance. I’m not advocating 100% stock if that isn’t your cup of tea, but I think you need to be more aggressive than 50/50, especially in your accumulation phase.

We went just about all in on stocks during accumulation and are finally dialing back now that we are about 2 years out from FI.

brandon1827

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Re: 401K Asset Allocation help
« Reply #12 on: January 22, 2019, 06:54:27 AM »
That makes sense, and I agree that being more aggressive than 50-50 is the right strategy for me at this point. I guess I was unsure how long before ER I should start thinking about playing it safer and choosing options on the more moderate end of the spectrum. The 401K won't be my primary income source in retirement, but until now I haven't thought about what I would do with my pension funds and expected windfalls, and it's never even crossed my mind that I could take those monies and add them to what I have invested in the 401K, as a possibility.

ysette9

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Re: 401K Asset Allocation help
« Reply #13 on: January 23, 2019, 02:00:42 AM »
That is a great question. To the best of what my reading has been, I don’t think there is a good answer.

Our plan is the “bond tent” or “revers equity glide path”. There is research looking at how quickly to increase equities in retirement but so far nothing on how fast and starting when to increase bonds before retirement.

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/