Author Topic: Terrible Bond Options in new 401k  (Read 803 times)

poko

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Terrible Bond Options in new 401k
« on: December 13, 2017, 09:48:27 PM »
So we are getting a new 401k provider. We get access to an institutional Vanguard fund now (VINIX), which is cool, but the bond options are garbage.

Of course all my bonds are in my 401k. What do?

Currently I have VBTLX (expense ratio of .05%) in my 401k, with new contributions set to buy majority bonds in order to balance out my AA for my total portfolio. New 401k will automatically roll over existing investments into "matching" funds. The matching one for VBTLX is PICYX with an expense ratio of .85%!!! There are two other funds available that hold bonds JDFNX (.45%) and DSDYX (.46%).

My reading shows that bonds should be held in tax advantaged accounts, hence all mine are in the 401k. Should I continue this strategy even though the new fund options are expensive? Or should I move all my bond holdings to my Roth? Right now my Roth is an REIT index and an S&P500 index. Should I sell the 500 index that is in there and buy bonds, and sell the bonds in the 401k to be all equities?

Minor plot twist, it also sounds like I will now have access to the mega backdoor Roth, which would enable me to buy even more bonds in there to balance out the AA more.

I haven't really sold much within the tax advantaged accounts themselves yet. Since I'm still in 'stache building mode, I just do my rebalancing by adding more into the under represented asset classes.

Is that the best approach? Or should I for some reason move my bonds to my taxable accounts?



Radagast

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Re: Terrible Bond Options in new 401k
« Reply #1 on: December 14, 2017, 08:06:23 PM »
Got be be honest. None of those stands out as clearly a better choice than the others.

I show PICYX er=0.58% ?

alexpkeaton

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Re: Terrible Bond Options in new 401k
« Reply #2 on: December 14, 2017, 08:32:41 PM »
I think your idea makes sense. Keep $0 in bonds in the 401k, buy a bond fund in the Roth IRA, just keep a simple spreadsheet to keep track of your allocation across accounts.

poko

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Re: Terrible Bond Options in new 401k
« Reply #3 on: December 14, 2017, 09:00:01 PM »
Quote
I show PICYX er=0.58% ?

Huh, you're right. I wonder how I misread that one! I think I was seeing red lol

I guess the main questions boil down to, is holding bonds in a 401k vs in a Roth much different in terms of a strategy? And is there anything I should know about rebalancing in either account type?

Radagast

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Re: Terrible Bond Options in new 401k
« Reply #4 on: December 14, 2017, 09:08:17 PM »
Quote
I show PICYX er=0.58% ?

Huh, you're right. I wonder how I misread that one! I think I was seeing red lol

I guess the main questions boil down to, is holding bonds in a 401k vs in a Roth much different in terms of a strategy? And is there anything I should know about rebalancing in either account type?
Not really. Roth is supposedly best for assets with the most expected growth, such as stocks, because they are tax free on the way out. 401k's are taxed on the way out, so if you plan on using things with lower expected growth that is the place to put them. Vanguard has a lot of great bond options for the Roth space, but on the other hand that is not the first choice of where to put them. In the end I think using one of the 401k bond funds might be best just because you will have more space for rebalancing.

That said, municipal bonds are a pretty good choice as well. They have the option of being easily used in the nearer term without taking a one-way trip out of tax advantaged space.