Asset Allocation: Too Much Exposure to US Large Cap in 401k?

[Turkey Leg]

We (Mr & Mrs MacNerd) are in our early 50's (late arrivals to the mustachian world). We work for the same large financial firm in the US. We need your thoughts on what an appropriate 401k funds mix is as we approach retirement in about 1.5 years.

Facts/assumptions:

• We have two buffers to shield us somewhat from market volatility:

• At retirement, we will both have a non-COLA'd pension, which will be a small fraction of our current salaries. (This pension cannot be taken in lump sum form, and payments MUST begin when we retire.)
• We plan to take Social Security at age 70, which will be about 15 years after we retire. (These monthly amounts will be pretty sizable.)

• Annual planned draw from 401ks after retirement: $50,000
• Stache at retirement = ~$1.2 million
• We have several 401k fund choices available at our firm: The usual Vanguard target date funds with low expense ratios, and three actively-managed private funds (managed by our firm), each with a ZERO EXPENSE RATIO.
• Current mix of our combined 401k accounts (three funds):

• 90% in an all-stock private fund (all US large cap). ER: 0.00%
• 5% in a 60/40 private fund (stocks = 100% US large cap). ER: 0.00%
• 5% in a Vanguard 30/70 fund. ER: 0.05%

The high exposure to mainly US large cap stocks REALLY bothers me. Thoughts:

• It's hard to beat a 0.00% expense ratio.
• Also my company is in the financial industry. Their investment department HAS to be good, or the company would have been out of business long ago.
• We have no other option for a fund with no expense ratio (well, there is a "fixed" fund--treasuries, etc). Our only other choice is one of the target date Vanguard funds.
• The two private funds mentioned above have returned great returns since inception (over 40 years). Both the large cap and the 60/40 private funds returned nearly 10%, with the large cap winning by 0.45%.
• We were 100% in the US large cap fund until a year ago, when I began moving a small portion to the other two funds.

My plan in the EARLY YEARS of retirement was to withdraw from whichever of the three funds performed better during the preceding 12 months. (At some point, we'd likely only be left with shares of the large cap private fund.)

What allocation would you go for?

[msilenus]

I'd be less worried about your sector exposure than the distribution of investments within the sector.

Lets say your funds have been consistently beating the market.  Over 40 years, there's surely been turnover among fund managers, or else there will be.  What if you catch a stinker?  Or what if the manager tilts one way heavily, and the market does something no one could have expected?  (Ie: due to geopolitical developments, natural disasters, et cetera.)

Personally, if I had pensions, I wouldn't sweat being 100% S&P 500.  It might not be ideal, but it's good enough.  That's not what you have.

[Turkey Leg]

Hmmm. Only one reply because I don't know the secret handshake?

[AdrianC]

•It's hard to beat a 0.00% expense ratio.
•Also my company is in the financial industry. Their investment department HAS to be good, or the company would have been out of business long ago.
•We have no other option for a fund with no expense ratio (well, there is a "fixed" fund--treasuries, etc). Our only other choice is one of the target date Vanguard funds.
•The two private funds mentioned above have returned great returns since inception (over 40 years). Both the large cap and the 60/40 private funds returned nearly 10%, with the large cap winning by 0.45%.

Most active managers do not beat Vanguard index funds, yet the companies stay in business and thrive. Your company's fund management could be less than mediocre and still the company does well.

Is it really 0% expense ratio? Or is it 0% management fee? There's a difference, and it could be significant.

What does "returned great returns since inception" mean to you? Substantially outperformed the S&P500?

Most people here, it seems to me, are mainly in US large caps (VTSAX, etc). It's not optimal, but will probably do OK.

[gluskap]

I'm not so concerned with being so heavily into US Large Cap personally.  But I would be concerned about how those private funds are managed.  As you say they seem to be doing well in the last 40 years so perhaps it's not that big of a concern but I prefer just putting it in an index but your call.  If the private funds are consistently beating the index and has zero expense fee then it's probably a good bet.

[Turkey Leg]

Is it really 0% expense ratio? Or is it 0% management fee? There's a difference, and it could be significant.

Yes, there are three types of expenses noted for this fund, and it explicitly states my company pays 100% of each of these. The ER is truly 0.00%.

What does "returned great returns since inception" mean to you? Substantially outperformed the S&P500?

Both the large cap and the 60/40 private funds returned nearly 10%, with the large cap winning by 0.45%.

The above return is from inception--sometime in the 1960s.


Thanks for replying!

[Turkey Leg]

As you say they seem to be doing well in the last 40 years so perhaps it's not that big of a concern but I prefer just putting it in an index but your call.  If the private funds are consistently beating the index and has zero expense fee then it's probably a good bet.

I can't put the money in an index. My only choices are:

• Several target date Vanguard funds (all of which have at least 10% bonds AND have > 0.00 ER)
• the privately-managed all US large cap (ER 0.00)
• the privately-managed 60/40 fund (ER 0.00)

Thanks for the feedback!

I might toss a bit more in the 30/70 Vanguard (maybe increase it to 10% from 5%), keep the 60/40 private fund at 5%, and lower the US Large Cap to 85% (from 90%).

[Turkey Leg]

I'd be less worried about your sector exposure than the distribution of investments within the sector.

Lets say your funds have been consistently beating the market.  Over 40 years, there's surely been turnover among fund managers, or else there will be.  What if you catch a stinker?  Or what if the manager tilts one way heavily, and the market does something no one could have expected?  (Ie: due to geopolitical developments, natural disasters, et cetera.)

Personally, if I had pensions, I wouldn't sweat being 100% S&P 500.  It might not be ideal, but it's good enough.  That's not what you have.

Thank you for the response! Psychologically, I think I'll sleep better with a couple of years expenses in the 30/70 Vanguard fund...a personality flaw for sure. Then come withdrawal time, if my main large cap fund is "in the toilet", I can take money from the 60/40 or 30/70 fund, whichever is "in the toilet" less.

[GGNoob]

I can't put the money in an index.

Vanguard Target Retirement Date Funds are made up of 4 index funds. They basically give you the three fund portfolio with the addition of international bonds.

[Turkey Leg]

I can't put the money in an index.

Vanguard Target Retirement Date Funds are made up of 4 index funds. They basically give you the three fund portfolio with the addition of international bonds.

I understand what the Vanguard target date funds are, but a Vanguard target date fund is technically not an index fund. It's multiple index funds. So we agree. Perhaps gluskap meant a target date fund instead of an index fund? Or I took the phrase too literally?

[GGNoob]

I can't put the money in an index.

Vanguard Target Retirement Date Funds are made up of 4 index funds. They basically give you the three fund portfolio with the addition of international bonds.

I understand what the Vanguard target date funds are, but a Vanguard target date fund is technically not an index fund. It's multiple index funds. So we agree. Perhaps gluskap meant a target date fund instead of an index fund? Or I took the phrase too literally?

Just making sure!

Do you have any more information you can post on these private funds to help us weigh in?

A lot of people invest only in funds like the S&P 500, so I wouldn't be too concerned with being too concentrated. But I prefer index funds myself compared to actively managed mutual funds.

[AdrianC]

Both the large cap and the 60/40 private funds returned nearly 10%, with the large cap winning by 0.45%.

The above return is from inception--sometime in the 1960s.

Well, a bit under 10% for 40 years is lagging the S&P500's 11.4%, for 50 years it about matches the S&P500. That's excellent.

You're not locked into your firm's investments once you retire, of course. We just rolled over a 401K from a previous employer to Vanguard. Took a few minutes online.

[Seppia]

I am also among those that would add a couple years expenses in the 60/40 fund or anything with more bonds, as the market is VERY high right now.
Might go even higher obviously, but the math/history is not exactly on the "all stocks" side right now.