401k: Target date vs index funds?

[GetItRight]

I'm in my late 20s and have been struggling to pay off some insane amounts of student loans for several years so have not contributed significantly to retirement, but have put enough to my 401k to get the match. I currently have $31k in a Vanguard target retirement fund, and am paying back a $15k 401k loan. I didn't want to do the 401k loan but it was the only way I could get rid of all the high interest (15%) student loans. Now all the high interest loans are consolidated into 5.75% with another bank, a 5% CC, and 4% in the 401k loan. I feel like my SL debt is as optimized as it's going to get at this point.

I noticed the fees on the target date fund are .18%, if I'm reading the document correctly. Many here say to just do index funds. While looking at the Vanguard index funds available under my 401k I see fees around .04%-.08%. Should I be considering ditching the target fund and spreading my investments across the various index funds? The fees are less, but with my pittance it's not a significant amount either way at this point. The general consensus here seems to be index funds are the way to go (with Vanguard being highly recommended) and anything else is too risky. Can I optimize the 401k a bit or is this not even worth worrying about at this point?

[lackofstache]

I say optimize it. It should be an easy shift for you to make & the higher fees may not be much, but you're giving them more money to allocate for you, which you can easily do.

[Cheddar Stacker]

List your options here including the name of the fund, the ticker, and the expense ratio. Let us help.

.18% is very low for a target date fund, but it is Vanguard so I guess it could be accurate. Don't look at the lower fee % as insignificant due to your low balance, that's a mistake. A percentage is a percentage. If you have $2K or $200K, you are still paying someone 0.14% more than necessary. It stunts growth at all dollar levels, the dollar amounts are virtually irrelevant.

[seattlecyclone]

For the record, Vanguard's target date funds are index funds, or rather a fund comprised of a few index funds in a certain ratio. The ratio is available on Vanguard's website. The reason the expense ratio is so high is because the target date fund typically invests in the "Investor" share class of each sub-fund. If you have access to admiral/institutional class versions of those same funds in your 401(k), there's no reason you can't exactly replicate your target date fund but with lower fees. Or if you think the target date fund over-invests in a certain asset class, you can correct the mistake when you do it yourself.

[MgoSam]

I didn't invest in Vanguard's Target funds because I would be billed at the not-Admiral rates, whereas by investing in their Admiral index funds, my expense ratio would be far lower. I didn't look at it like .18% isn't too high, but rather that it it is 4x as much as their Total Stock Market fund. I think my weighted-average expense ratio is around .06%, so this is 3x lower. Over the next decade, it can add up.

[VirginiaBob]

This post is timely as I just transferred all of my target date vanguard funds over to the total stock market index fund.  Low admiral fund fees and higher returns.  No need to be conservative in your 20's/30's.  Go all in!

[wtjbatman]

If you have access to low cost index funds in your 401k, yes, transfer/rebalance your 401k now. You certainly aren't doing it wrong with the Target date fund, but you can do even better with individual index funds. Find an Asset Allocation you are comfortable with, then invest accordingly.

[hyla]

I currently have slightly less than you in a Vanguard Target Retirement, and while I could lower my fees slightly by switching to individual index funds, I don't yet have enough in there to qualify for Admiral Funds in anything except the largest chunk (total stock market) of the asset allocation, and in order to meet Vanguard's 3k minimums, I would need to buy more bond fund than I want to have in bonds.  Also, I like that my target fund automatically rebalances the asset allocation as the market changes.  I may move to individual index funds in a few years when my account is larger and I could qualify for more admiral funds.

The other posters are correct that you could lower you're fees by switching, but 0.18% is not bad, and Target funds do have some advantages.  If you do want to switch to individual index funds, make sure meeting the 3k minimum for a certain fund won't mess up your desired asset allocation and tilt your investments more than you want towards that fund.  And think about whether you will be diligent about rebalancing yourself.