Author Topic: Any advice on my Deferred Comp options?  (Read 952 times)

DerrickP

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Any advice on my Deferred Comp options?
« on: February 07, 2018, 12:14:34 PM »
I am currently investing in the Vanguard Target Retirement 2040 Sel (VTR40) Trust.I was wondering if it would make more since to invest in any of the other options below or should I just keep in in the VTR40?

Stocks available:
Northern Trust All Country World ex-US Index Fund (NTACW)
Northern Trust Russell 2000 Index Fund (AAAAB)
Vanguard Institutional 500 Index Trust (VI500)

Bonds available:
Vanguard Total Bond Market Index Fund (VBMPX)

Money Market/Stable Value available:
Invesco Stable Return Fund (SV-Q5)
VANGUARD TREASURY MNY MRKT INV (VUSXX)

That is pretty much all I have available other than the target retirement funds through Vanguard.




PathtoFIRE

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Re: Any advice on my Deferred Comp options?
« Reply #1 on: February 07, 2018, 01:25:16 PM »
Those are a helluva lot better choices than what I get in my deferred comp plan. What are the various expense ratios for each? If it's similar to Vanguard institutional ERs, then an 80/20 VI500/VBMPX may be slightly less than the VTR40, but probably negligible. Of course it also depends on what your risk tolerance and goals for this money are. But I'd start with the ERs, and then narrow down to only the funds that are nice and low, and go from there.

For comparison, my lowest fund is an SP500-like instrument from Pacific Life that charges 0.33%, everything else is just under or over 1%, so that's what I go with, and don't even attempt to balance in some foreign equities or bonds in that particular account.

DerrickP

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Re: Any advice on my Deferred Comp options?
« Reply #2 on: February 07, 2018, 01:54:57 PM »
The ER's are below. They also charge a quarterly maintenance fee of $16.75.

My current VTR40 is .05%

Stocks available:
Northern Trust All Country World ex-US Index Fund (NTACW) - .05%
Northern Trust Russell 2000 Index Fund (AAAAB) - .02%
Vanguard Institutional 500 Index Trust (VI500) - .01%

Bonds available:
Vanguard Total Bond Market Index Fund (VBMPX) - .03%

Money Market/Stable Value available:
Invesco Stable Return Fund (SV-Q5) - .35%
VANGUARD TREASURY MNY MRKT INV (VUSXX) - .09%

PathtoFIRE

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Re: Any advice on my Deferred Comp options?
« Reply #3 on: February 08, 2018, 08:27:42 AM »
Those fees are phenomenally low, lucky you. Just for comparison, getting Vanguard Target Retirement 2040 Fund (VFORX) off the shelf has an ER of 0.15%.

Using VFORX as a proxy for your fund since they should be similar/identical, here's what it holds:
Vanguard Total Stock Market Index Fund Investor Shares    51.3%
Vanguard Total International Stock Index Fund Investor Shares    34.5%
Vanguard Total Bond Market II Index Fund Investor Shares*    10.0%
Vanguard Total International Bond Index Fund Investor Shares    4.2%
Total        100.0%

So you can't exactly replicate this with the individual funds available to you, but getting close and using the ERs you provide, I get an ER of 0.028%
Here's my math:
[VI500 0.01 * 0.513 * 0.7 (top 500 companies usually comprise about 70% of total US stock market)] +
[AAAAB 0.02 * 0.513 * 0.3] +
[NTACW 0.05 * 0.345] +
[VBMPX 0.03 * 0.142 (you don't have an international bond fund available so I lumped all bonds into this)]

So you could nearly replicate the current holdings of VTR40/VFORX for a savings of 0.02, but you would lose the automatic rebalancing. If it were me, and I wanted an asset allocation similar to VTR40, I wouldn't break it apart in a tax deferred account like this.

Therefore, the only question to ask yourself is if this meets both your overall asset allocation needs based on your IPS, and whether it meets the specific needs of this account. I treat my deferred comp account as part of my overall retirement portfolio, and therefore don't earmark it for any specific use. That combined with my overall asset allocation (80%stock/20%bonds) and the lack of other options means I dump all of my money into an SP500-like instrument, and then somewhere else (mostly my 401k) I add a little extra foreign stocks and US bonds to balance it out.

However, since I will be paid this money at some point in the future, maybe near term, I may change it to something less volatile as I approach retirement and foresee using this money to fund the first year or two of retirement.

Another consideration is taxes. At some point you will have to pay regular income taxes on the distribution and the earnings (I believe, someone correct me here if the "gains" are treated differently). So this has some potentially harsher tax consequences compared to 401k/IRA distributions, etc. In other words, one could conceivably put deferred comp funds into solely bonds, while keeping mostly equities in your 401k and other retirement accounts, in order to keep your deferred comp balance as low as possible in order to reduce the income taxes paid once you get the distribution. I personally have not done that, in part because it's too hard to predict, and in part most of my balance will be deferrals and company matches anyway, not earnings. Am I going to get the deferred comp at the end of a year where both my wife and I work and I'm not expecting it but get laid off and get it anyway? This would be heavily taxed. Or maybe I can engineer it so that I get it at the beginning of a new year after we have both stopped work, and therefore this represents the only earned income I'll get in that year. I don't actually do this, but I could see the wisdom in discounting your deferred comp plan, by say 15% or 20% in anticipation of the eventual tax hit.

DerrickP

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Re: Any advice on my Deferred Comp options?
« Reply #4 on: February 08, 2018, 08:42:13 AM »
Thanks for the info. I think due to the automatic re-balancing I'm going to just leave it in the VTR40. I'm definitely happy with the ER's and the quarterly fee isn't that bad either. The other benefit I have is that there is no state income tax on our retirement accounts in the state I live in.  I appreciate your advice.