Author Topic: Setting up my 401k, not sure what these options mean  (Read 3035 times)

Cool Friend

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Setting up my 401k, not sure what these options mean
« on: July 20, 2018, 01:35:23 PM »
In the packet HR gave me, there is a a bunch of investment choices I can allocate my contributions to, but I don't know what any of it means, really, as I'm pretty new to this stuff.  My company's 401k plan is managed by Principal Financial Services Inc, and all these options are from Principal except where noted in parentheses.  Do I need to research each and every one of these to figure out if I should allocate some contributions to it?  Here's the full list:

Short-Term Fixed Income
Guaranteed Interest Account 2 Year
Guaranteed Interest Account 7 Year
Liquid Assets Separate Account

Fixed Income
Inflation Protection Separate Account (BlackRock Financial Mgmt Inc)
Core Plus Bond Separate Acccount
Government & High Quality Bond Sep Account
U.S. Property Sep Acct

Balanced/Asset Allocation
SAM Balanced Separate Account
SAM Conservative Balanced Separate Account
SAM Conservative Growth Separate Account
SAM Flexible Income Separate Accont
SAM Strategic Growth Separate Account
(all Multiple Sub-Advisors)

Large U.S. Equity
Blue Chip Separate Account
LargeCap S&P 500 Index Separate Account
LargeCap Value Separate Account

Small/Mid U.S. Equity
SmallCap Growth I Separate Account (AB/Brown/Emerald)
MidCap Growth Separate Account (Columbus Circle Investors)
SmallCap Value II Separate Account (DFA/Vaughan Nelson/LA Capital)
MidCap S&P 400 Index Separate Account
MidCap Separate Account

International Equity
Diversified International Separate Account
Internatinoal SmallCap Separate Account

Radagast

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Re: Setting up my 401k, not sure what these options mean
« Reply #1 on: July 20, 2018, 02:04:26 PM »
Probably you should only consider the 5 with the lowest expense ratios, so look those up first and you can get rid of the garbage pretty quickly.

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #2 on: July 20, 2018, 03:00:22 PM »
Okay!  With that in mind.  Here are the five with the lowest expense ratios.  I've also listed the composition of assets for each fund.  Incidentally, it looks like it gives me a pretty even blend of stocks and bonds.  The "other" in the Liquid Assets fund is described in the booklet as "U.S. dollar denominated securities which the sub-advisor believes presents minimal credit risks" (whatever that means).

LargeCap S&P 500 Index Separate Account - 0.31
95.86% US Stocks, 3.33% Cash, 0.81% Non-US Stocks

MidCap S&P 400 Index Separate Account - 0.31
95.66% US Stocks, 3.96% Cash, 0.38% Non-US Stocks

Inflation Protection Separate Account - 0.55
85.9% Bonds, 8.03% Non-U.S Bonds, 6.07% Cash

Liquid Assets Separate Account - 0.56
90.42% Other, 9.58% Bonds

Government & High Quality Bond Sep Account - 0.59
98.76% Bonds, 1.24% Cash

SteadyDoinIt

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Re: Setting up my 401k, not sure what these options mean
« Reply #3 on: July 20, 2018, 03:07:50 PM »
100% allocation in Large Cap S&P 500

seattlecyclone

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Re: Setting up my 401k, not sure what these options mean
« Reply #4 on: July 20, 2018, 03:18:23 PM »
100% allocation in Large Cap S&P 500

Yep, nothing wrong with this as you get started. As you learn more about investing you may decide that you want to reduce your risk a bit by owning some bonds, or diversify into some international or smaller-cap stocks. For someone getting started, 100% large-cap US stocks is a perfectly defensible allocation.

sisto

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Re: Setting up my 401k, not sure what these options mean
« Reply #5 on: July 20, 2018, 03:22:11 PM »
Posting to concur I'd go 100% in the Large Cap S&P 500 too.

Radagast

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Re: Setting up my 401k, not sure what these options mean
« Reply #6 on: July 20, 2018, 03:56:24 PM »
I would say either or any combination of the S&P500 or S&P400 is a good choice.

At those expense ratios I'd try to keep bonds in an IRA to the extent you want them and international stocks in the IRA or as the first choice for taxable accounts.

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #7 on: July 20, 2018, 04:20:30 PM »
Awesome, thank you guys so much!  I love a simple solution.  I'll go 100% for the S&P500

MDM

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Re: Setting up my 401k, not sure what these options mean
« Reply #8 on: July 20, 2018, 05:15:46 PM »
Awesome, thank you guys so much!  I love a simple solution.  I'll go 100% for the S&P500
No real argument with that.

If you want to Approximate the total stock market, you could do ~82% S&P 500 and 18% S&P 400.

Raymond Reddington

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Re: Setting up my 401k, not sure what these options mean
« Reply #9 on: July 21, 2018, 03:39:09 PM »
What is your age? If you're a younger worker, I'd go 100% in the equities.

I'd diversify between the S&P 500 Index (large cap) and the mid cap. Right now we are in a part of the economic cycle where midcaps have been outperforming large cap, and it's good to maintain at least some exposure to that space. It also protects you in the event of a trade war, as the impact of tariffs is typically felt by large multinational corps, but not as much by small and mid cap stocks. Maybe 80/20 large cap to mid cap.

If you're older, you might wish to work the bond index fund in there as well. A good rule of thumb I like for ideal bond holding percentages is 50% - twice the number of years you have to go to retirement. So if you're 30 looking to FIRE at 50, you'd be 10% bonds ideally. If you're retired now, you're 50/50, which leaves room for the growth necessary to support today's longer life expectancies. If you're 25, you'd be 100% equities.
« Last Edit: July 21, 2018, 03:40:54 PM by Raymond Reddington »

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #10 on: July 23, 2018, 08:28:10 AM »
I'm 33.  I only have about $1,800 in an old 401k that I'm going to roll over to this one, since my post-college working years were very spotty and I wasn't able to save well during that time.

Also, it looks like my employer has a 5 year graded contribution matching program.  At least that's what it sounds like from the literature:

"You are always 100% vested in the contributions you choose to defer. You cannot forfeit these contributions [I take this to mean this is the money I'm electing to take out of my paycheck pre-tax].

You are vested in employer contributions based on years of vesting service with your employer as shown below [I take this to mean my employer will match my contributions on the below schedule]:

<1 Years - 0%
1 Year - 20%
2 Years - 40%
3 Years - 60%
4 Years - 80%
5 Years - 100%"

If I'm interpreting this correctly, this means that after 1 year of my investing in the 401k, my employer will contribute 20% of what I contribute thereafter, bumping it up by an additional 20% each year until they are matching my contributions 100% (5 years later).

With this in mind, what would be a good strategy for my own contribution percentage?  Since there won't be employer matching the first year, is it best to do something conservative like 10% or even 5%?  My salary is $57,000, so I don't think I'll be able to aim for maxing the $18,500 annual contribution limit.

PizzaSteve

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Re: Setting up my 401k, not sure what these options mean
« Reply #11 on: July 23, 2018, 08:45:39 AM »
I'm 33.  I only have about $1,800 in an old 401k that I'm going to roll over to this one, since my post-college working years were very spotty and I wasn't able to save well during that time.

Also, it looks like my employer has a 5 year graded contribution matching program.  At least that's what it sounds like from the literature:

"You are always 100% vested in the contributions you choose to defer. You cannot forfeit these contributions [I take this to mean this is the money I'm electing to take out of my paycheck pre-tax].

You are vested in employer contributions based on years of vesting service with your employer as shown below [I take this to mean my employer will match my contributions on the below schedule]:

<1 Years - 0%
1 Year - 20%
2 Years - 40%
3 Years - 60%
4 Years - 80%
5 Years - 100%"

If I'm interpreting this correctly, this means that after 1 year of my investing in the 401k, my employer will contribute 20% of what I contribute thereafter, bumping it up by an additional 20% each year until they are matching my contributions 100% (5 years later).

With this in mind, what would be a good strategy for my own contribution percentage?  Since there won't be employer matching the first year, is it best to do something conservative like 10% or even 5%?  My salary is $57,000, so I don't think I'll be able to aim for maxing the $18,500 annual contribution limit.
I think it means that after year 1, 20% of what the employer contributes remains yours, should you leave the company.

How much the employer matches is different from vesting schedules.  So for example, lets say you contribute $100 the first year.  If the employer matches 1 for 1, they add $100 to your fund.  Assuming you have a 10% gain, at the end of the year you have $110 of your money and then the $100 employer match, in the account.  However, at that point you could only rollout your money ($110) + 20% of the employer money ($20).

The full employer amount stays in the account, but you can only take your vesting percentage.  Interestingly, it stays there as long as you stay in the 401k, not how long you are an employee and will continue to earn returns.  However, you will only be able to withdraw the % of employer funds and gains on those funds that have vested.  That way, if you ever leave the employer, but later are rehired your vesting percentage can continue to advance.  The vesting only impacts the fund balance if you ever roll over the account or withdraw the funds permanently.
« Last Edit: July 23, 2018, 08:48:02 AM by PizzaSteve »

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #12 on: July 23, 2018, 09:23:20 AM »
Ohhh okay, that makes sense.  I'll need to figure out what (if any) employer matching there really is, because it doesn't appear anywhere in the booklet they gave me.

seattlecyclone

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Re: Setting up my 401k, not sure what these options mean
« Reply #13 on: July 23, 2018, 09:23:26 AM »
Right. If you look in your 401(k) account you should be able to see what fraction of your $1,800 is your own contributions and what fraction is the employer match. If you worked there for less than five years, the appropriate fraction of that employer match will go away at the time you roll the account over.

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #14 on: July 23, 2018, 10:22:17 AM »
Ah, to clarify, that $1,800 is a rollover from a previous employer who did not offer matching.

Just heard from HR, who tells me that the employer matching contribution is "3% of your contribution plus additional 3% at the end of the year on your overall salary."  I asked about caps/limits to the matching but she didn't mention any.

So here's a breakdown of what would be happening based off of a couple percentages.

Salary: $61,000
10% - $6,100 (my contribution), $183 (3% contribution matching) and $1,830 (overall salary matching)
12% - $7,320 (my contribution), $219.50 (3% contribution matching) and $1,830 (overall salary matching)
15% - $9,150 (my contribution), $274.50 (3% contribution matching) and $1,830 (overall salary matching)

Proud Foot

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Re: Setting up my 401k, not sure what these options mean
« Reply #15 on: July 23, 2018, 10:33:56 AM »
Ah, to clarify, that $1,800 is a rollover from a previous employer who did not offer matching.

Just heard from HR, who tells me that the employer matching contribution is "3% of your contribution plus additional 3% at the end of the year on your overall salary."  I asked about caps/limits to the matching but she didn't mention any.

So here's a breakdown of what would be happening based off of a couple percentages.

Salary: $61,000
10% - $6,100 (my contribution), $183 (3% contribution matching) and $1,830 (overall salary matching)
12% - $7,320 (my contribution), $219.50 (3% contribution matching) and $1,830 (overall salary matching)
15% - $9,150 (my contribution), $274.50 (3% contribution matching) and $1,830 (overall salary matching)

You might ask for more clarification on the bolded portion above.  That is a really low match percentage. Most of the 401k plans I have seen have had the match as x% of contribuitons up to Y% of salary. My current employer matches 50% of my contributions us to 8% contributions. Meaning if my salary is $100k and I contribute 8% ($8k) the employer match will be $4k(4% = 50% of 8%)

Raenia

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Re: Setting up my 401k, not sure what these options mean
« Reply #16 on: July 23, 2018, 10:55:53 AM »
Ah, to clarify, that $1,800 is a rollover from a previous employer who did not offer matching.

Just heard from HR, who tells me that the employer matching contribution is "3% of your contribution plus additional 3% at the end of the year on your overall salary."  I asked about caps/limits to the matching but she didn't mention any.

So here's a breakdown of what would be happening based off of a couple percentages.

Salary: $61,000
10% - $6,100 (my contribution), $183 (3% contribution matching) and $1,830 (overall salary matching)
12% - $7,320 (my contribution), $219.50 (3% contribution matching) and $1,830 (overall salary matching)
15% - $9,150 (my contribution), $274.50 (3% contribution matching) and $1,830 (overall salary matching)

You might ask for more clarification on the bolded portion above.  That is a really low match percentage. Most of the 401k plans I have seen have had the match as x% of contribuitons up to Y% of salary. My current employer matches 50% of my contributions us to 8% contributions. Meaning if my salary is $100k and I contribute 8% ($8k) the employer match will be $4k(4% = 50% of 8%)

Agreed, that is a very strange way to set it up.  Most places are 100% up to 3-4%, or 50% up to 6-8%, or something in that range.  Can you confirm if they actually mean they match 100% of your contribution up to 3% (i.e they match 3% of your salary, not 3% of your contribution)?  That would be a much more normal matching.

Cool Friend

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Re: Setting up my 401k, not sure what these options mean
« Reply #17 on: July 23, 2018, 12:51:07 PM »
Yeah it sounded strange to me too.  I rephrased what she told me and asked again about the contribution limit and all she said was that I could contribute as much as I wanted as long as I don't hit the IRS deferral limit (the $18,500). She doesn't seem to have any more info than that (HR is just one of her many jobs at this small company), so maybe I'll have to ask Principal what the deal is.

If it is actually 100% matching with a 3% of salary limit, then I guess I don't need to worry about maximizing the company matching, The limit for my salary would be $1,830, which I would get with even a measly 5% contribution from me.

PizzaSteve

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Re: Setting up my 401k, not sure what these options mean
« Reply #18 on: July 24, 2018, 02:04:15 PM »
Yes.  Usually they match dollar for dollar, up to a certain percent (in this case 3% of your base pay).  So assuming you earned $10,000 and had 3% withheld, you would have 6% or $600 in the account, 300 yours and 300 theirs 20% vested.  The additional matching would be another 300, and is probably contingent on the company hitting a certain profit sharing goal, I imagine.