Author Topic: American Funds Question  (Read 5035 times)

FIUBLUE1811

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American Funds Question
« on: March 05, 2015, 08:52:58 PM »
I've been a long time reader, but this is my first post.

I subscribe to the Boglehead philosophy of index funding and do my investing with Vanguard and my government TSP account. I'm no expert, just understand the basics of index investing.

My question is in regards to my girlfriend/future fiancÚ. She is overall good financially as she's frugal and budgets her cash, but she has no interest in investing. She made the dumb decision right when we met 2 years ago to lease a car. A decision she now regrets and a decision I didn't steer her away from too hard as we had just started dating and she was pushed towards it by family. She doesn't make much and between the lease and rent she's not left with much. Since we've started dating I've slowly been introducing her to the MMM philosophy and she's been taking to it. The lease is up this year thankfully.

Her employer offers a 401k plan with a 5% match. I've convinced her to at least contribute up the match as its free money (she doesn't have much money left over at the end of month so she was initially hesitant).

Now my question is, she is limited to investing in "American Funds". I believe these are actively managed funds not index funds. I currently have her invested in the American Funds 2050 Retirement Funds as it seemed to be a simple fund for someone not interested in finance. I figured this would be closest to a Vanguard Target Fund?

I don't much about these "American Fund" funds, any funds I should look for someone with a long horizon to retirement?

She does not plan to stay in this job long term, and I've spoken with her about putting any other money she has available for investing into a Vanguard ROTH IRA in the future after meeting her company match.


Thanks,

FIUBLUE1811

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Re: American Funds Question
« Reply #1 on: March 05, 2015, 10:00:43 PM »
American Funds is a huge ($1.3T+) fund family with a strong track record and relatively low fees for an actively managed fund. Your gf could do much worse imo. Considering her lack of interest in investing, the target date fund is a solid choice. Other options given the long time horizon would be a mix of things like the Growth Fund of America, EuroPacific Growth Fund, and/or New World Fund, but the target date will blend some of these automatically to an appropriate level. I can't speak to the Roth vs other options, but hopefully this is somewhat helpful.

MDM

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Re: American Funds Question
« Reply #2 on: March 05, 2015, 10:09:10 PM »
You'll have to dig a little more to determine exactly what fees she is paying within the 401k.  That is true in general, because fees can be lower (e.g., if the 401k uses institutional shares) or higher (e.g., if the fund administrator adds a charge on top) than an individual investor would pay in a regular brokerage account.

Specifically, there are at least two different classes of "American Funds 2050 Retirement Funds":
https://fundresearch.fidelity.com/mutual-funds/summary/02631C619
http://www.marketwatch.com/investing/fund/RCITX

She may able to look at her 401k options, including fees, online.

But even if the fees are somewhat high, the 5% match will more than compensate.  Your gf is getting good advice from you - hope she appreciates it. ;)

danny9m

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Re: American Funds Question
« Reply #3 on: March 06, 2015, 04:30:07 AM »
I'd check to see what kind of index funds the plan has and see if you can make your own retirement fund. Check to see if the American funds have a load. Let's say the American funds have a total expense ratio of 1, and have another 1 to 2 percent of Un recorded expenses.  Jack Bogel has written extensively on this. You are effectively giving away all the dividends and interest your account produces.  Also, pbs has a documentary on this, the retirement crisis. After many years your girlfriend will find her return isn't what she thought it would be. I know because it happened to me. I now use the s&p 500 along with an income fund in my 401k and suddenly performance has improved over the past few years.


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ltt

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Re: American Funds Question
« Reply #4 on: March 06, 2015, 05:24:22 AM »
I invest in American Funds--Washington Mutual.  They have consistently paid dividends every quarter since I started investing in them many, many years ago. 

http://money.usnews.com/funds/mutual-funds/large-value/american-funds-washington-mutual-investors-fund/awshx
« Last Edit: March 06, 2015, 05:30:39 AM by ltt »

FIUBLUE1811

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Re: American Funds Question
« Reply #5 on: March 06, 2015, 06:11:43 AM »
You'll have to dig a little more to determine exactly what fees she is paying within the 401k.  That is true in general, because fees can be lower (e.g., if the 401k uses institutional shares) or higher (e.g., if the fund administrator adds a charge on top) than an individual investor would pay in a regular brokerage account.

Specifically, there are at least two different classes of "American Funds 2050 Retirement Funds":
https://fundresearch.fidelity.com/mutual-funds/summary/02631C619
http://www.marketwatch.com/investing/fund/RCITX

She may able to look at her 401k options, including fees, online.

But even if the fees are somewhat high, the 5% match will more than compensate.  Your gf is getting good advice from you - hope she appreciates it. ;)

Thanks MDM, I'll take a look at them again this weekend. Her account only had the option for one 2050, I'll check to see which one.

skyrefuge

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Re: American Funds Question
« Reply #6 on: March 06, 2015, 10:23:46 AM »
I invest in American Funds--Washington Mutual.  They have consistently paid dividends every quarter since I started investing in them many, many years ago. 

Er, what? Every stock mutual fund will consistently pay dividends. If you're using that fact as some kind of measurement of the "quality" of AWSHX, you need to learn a bit more about mutual funds. That's like reporting that you bought a Cadillac, and it drives forward. Hooray?

If you had been investing in VTSAX (Vanguard's Total Market fund) for the last 10 years instead, you would have more money now, particularly if you've been paying sales loads for AWSHX.

brooklynguy

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Re: American Funds Question
« Reply #7 on: March 06, 2015, 10:44:03 AM »
That's like reporting that you bought a Cadillac, and it drives forward.

Do you come up with these shrewd analogies on the fly, or do you have a book of them written down somewhere?

I nominate skyrefuge to ghostwrite Berkshire Hathaway's annual shareholders' letter once Buffett is no longer in a position to write them himself.

trailrated

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Re: American Funds Question
« Reply #8 on: March 06, 2015, 12:14:49 PM »
That's like reporting that you bought a Cadillac, and it drives forward.

Do you come up with these shrewd analogies on the fly, or do you have a book of them written down somewhere?

I nominate skyrefuge to ghostwrite Berkshire Hathaway's annual shareholders' letter once Buffett is no longer in a position to write them himself.

It got the point across, and in the context made perfect sense.

skyrefuge

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Re: American Funds Question
« Reply #9 on: March 06, 2015, 01:49:08 PM »
Do you come up with these shrewd analogies on the fly, or do you have a book of them written down somewhere?

I nominate skyrefuge to ghostwrite Berkshire Hathaway's annual shareholders' letter once Buffett is no longer in a position to write them himself.

ha...on-the-fly, of course! I originally typed "Toyota", but then realized "Cadillac" worked a lot better standing in for American Funds, though I still wasn't all that happy with it...good to hear it at least hit the mark with a couple people!

I figure they have to be on-the-fly, otherwise I run the danger of sounding like Buffett with some of his old standbys. They sound great the first time you hear them, but then as a continuing reader over the years, when you hear them again and again, it plants that seed of doubt in you: "is this guy still thinking new thoughts, or is his brain now only capable of regurgitating his previous brilliance?" (for the record, I neither think Buffett has stopped thinking new thoughts, nor do I think his analogy re-use is particularly egregious, or even noticeable, so unfortunately I don't think he's going to summon me for ghost-writing duties just yet!)

Wolf359

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Re: American Funds Question
« Reply #10 on: March 06, 2015, 03:38:00 PM »
American Funds.  Grrr. I had a small employer who had them as our 401-k.  I made that employer very unhappy because I read the prospectuses. 

Your mileage may vary.  Every 401-k plan is different, and was probably set up by different advisors.  Also, this was about 15-20 years ago, so they may have changed.  What I remember was:

- The American Funds I remember were all actively managed. Their expense ratios weren't outrageous, but they weren't index funds, either.

- The American Fund Retirement Target funds were a fund of funds.  Basically, they put you into pretty much every other fund they had.  Some had high expense ratios.  Some had really high expense ratios.  To cover it up, they gave an "average" expense ratio.  If you look them up, you can see what you really pay.  On the other hand, any one fund was typically only 3-4% of the total makeup.

- As a fund of funds, there was a lot of style duplication between the many funds they put you into.  Like 4 different growth and income funds?

- The thing I hated the most was the 12-b-1 fees.  This is essentially a continuous load.  I think it was around 0.75.  Basically, it meant that in addition to the fund fees, they took out 0.75% of the balance and gave it to the sales guy who sold the 401-k to the company.  The President of the company was proud because he had switched us from a loaded fund to this "no-load" model.  Instead of paying 4% upfront, we paid 0.75% every year.  401-k administrators don't work for free, but they would be much cheaper if you paid them a flat fee. 

Her plan may or may not have the 12-b-1, but they count it separately from the expense ratio.  Both count against your return. 

I had no choice but to participate in the plan while I worked there.  I maxed out my contributions (they thought I was a bit of a kook for doing so).  The happy ending was that even with a bad plan, I built up a good-sized nest egg that's the core of what I'm going to retire on now.  My returns stunk back then, but at that early age, a high savings rate matters more than actual return.  Once the money went into a decent plan with decent returns, it could grow.

My advice -- max out the contributions, and transfer to a self-directed IRA when she goes to her next job.  She may be able to lobby her plan administrator for a low-cost indexing option.  Keep in mind that technically the pension plan administrator has a fiduciary duty to pick appropriate investment options.

Indexer

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Re: American Funds Question
« Reply #11 on: March 07, 2015, 10:10:33 AM »
American Funds:  Of the expensive loaded active mutual funds they are the least crappy.

So I wouldn't go out of my way and invest in them on my own, but if they were offered in a 401k I wouldn't avoid the 401k either depending on the share class.
 
A shares:  expensive.  Buying a Cadillac expensive.  Huge 4-5% up front fees.
B & C shares:  expensive.  Leasing a Cadillac expensive.  No upfront fee, but higher annual ongoing fees and sometimes penalties for getting out early.

R shares.  R shares are for employer plans, but there is a wide range within these.  Looking at the Target Retirement 2050 the R-1 has an ER of 1.67%, and the expenses go down as you go from R-1 to R-6 with the R-6 being 0.54%.    R1-R3 all had ERs over 1%.  R-4 was still around 0.9.  R-5 was actually about as low as R-6.

Since its an employer plan it probably has R shares.  If its the R-1 through R-4 I would put in just enough to get the match and then I would work on IRAs instead.  If its the R-5 or R-6 that isn't too bad. 

FIUBLUE1811

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Re: American Funds Question
« Reply #12 on: March 07, 2015, 05:15:01 PM »
American Funds:  Of the expensive loaded active mutual funds they are the least crappy.

So I wouldn't go out of my way and invest in them on my own, but if they were offered in a 401k I wouldn't avoid the 401k either depending on the share class.
 
A shares:  expensive.  Buying a Cadillac expensive.  Huge 4-5% up front fees.
B & C shares:  expensive.  Leasing a Cadillac expensive.  No upfront fee, but higher annual ongoing fees and sometimes penalties for getting out early.

R shares.  R shares are for employer plans, but there is a wide range within these.  Looking at the Target Retirement 2050 the R-1 has an ER of 1.67%, and the expenses go down as you go from R-1 to R-6 with the R-6 being 0.54%.    R1-R3 all had ERs over 1%.  R-4 was still around 0.9.  R-5 was actually about as low as R-6.

Since its an employer plan it probably has R shares.  If its the R-1 through R-4 I would put in just enough to get the match and then I would work on IRAs instead.  If its the R-5 or R-6 that isn't too bad.

It's the R2. She's currently putting enough for the match and actively looking for another job, hopefully she'll be out of there by year's end. In the meantime I'm trying to encourage her to save to fund a ROTH IRA.

Thanks.