Author Topic: seeking mustachian advice on 401(k) reallocation  (Read 2386 times)

GerryS

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seeking mustachian advice on 401(k) reallocation
« on: July 29, 2015, 10:35:06 PM »
Good evening everyone,

I would like your input on my proposed 401(k) portfolio reallocation.

Current Balance and Allocation: $109,152
BlackRock LifePath 2040 - $95,391 (87%); ER .1880
Company Common Stock Fund - $13,761 (13%); ER .0462

Available Fund Options (proposed reallocation and future contributions):
Invesco Fixed Income Fund (35%); ER .3389
S&P 500 Index (36%); ER .0427
Mid-Cap Index (3%); ER .0818
Small-Cap Index (6%); ER .5282
International Equity (20%); ER .1751

Unless noted State Street manages the funds in our portfolio

Other details:
  • This will be my 3rd year in a row maxing out 401(k) contributions
  • I created the above allocation with Rick Ferri 3 fund lazy portfolio as a guide and have tried approximating the mix of VTSMX via S&P500, Mid and Small
  • My fees are pretty low but would like to get them lower :-)
  • I have an IRA at Ameriprise, but haven't included that here as I plan to break up with my FA next week and move over to Vanguard. Now that I know I have paid load, ~1% ER across portfolio and another 1.25% wrap she's gone. I've wised up.
  • My plan caps company stock at 10%. I've exceeded 10% due to stock price gains. I plan to leave that balance alone and to stop future contributions until it resettles to 10% then I'll start buying more
This is my first foray into a DIY low fee strategy so I want to make sure I'm on the right track, but I have several questions:
  • Is a Fixed Income Fund the same as a Bond Fund? The fund prospectus talks about investing in high quality bonds and wrap contracts. I don't know what wrap contracts are.
  • Should I even put money into Fixed Income in my plan (it does have the 2nd highest fee) or should I leave that to a bond allocation in my IRA?
  • I've also thought about reducing my company stock to even 5% and locking in some gains. My total Stock Cost is reported as $9740 so thats $4000 in gains. I don't think our stock is going to go down anytime soon. Should I leave it alone or reduce this to 5%?
  • Small-cap has the highest fee. Should I just ignore it, along with Mid-cap, and stop trying to match VTSMX and just stick to S&P500 fund?
I welcome any and all suggestions.

Thanks,
Gerry

forummm

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #1 on: July 30, 2015, 07:47:54 AM »
If "Company Common Stock Fund" is stock in the firm you work for, I would replace that with the S&P500 fund instead. You don't want to risk the firm going down and have both your income and your portfolio tank due to that. Set it to 0%.

Other than that, you should be fine.

MoneyDoesntGrowOnTrees

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #2 on: July 30, 2015, 07:56:30 AM »
Hi Gerry,

Great questions.

Is a Fixed Income Fund the same as a Bond Fund? The fund prospectus talks about investing in high quality bonds and wrap contracts. I don't know what wrap contracts are.
A bond is a type of a fixed income investment. But not all fixed income investments are bonds. Generally speaking, if you do not know what it is, you should not be investing in it. Google it!

Should I even put money into Fixed Income in my plan (it does have the 2nd highest fee) or should I leave that to a bond allocation in my IRA?
You have the right idea. You asset allocation should be across all your investments: tax-free (Roth), tax-deferred (401k, IRA) and taxable. If you have a better option within another type of your tax-deferred accounts, definitely look there first.

I've also thought about reducing my company stock to even 5% and locking in some gains. My total Stock Cost is reported as $9740 so thats $4000 in gains. I don't think our stock is going to go down anytime soon. Should I leave it alone or reduce this to 5%?
Reduce immediately. I would even advocate you dropping to zero. Your compensation is already tied to this company, so you might as well diversify. As an aside, there are no tax implications of re-balancing within your 401k, so pay no heed to gains or losses. Just make the right asset allocation decisions and you are set.

Small-cap has the highest fee. Should I just ignore it, along with Mid-cap, and stop trying to match VTSMX and just stick to S&P500 fund?
This goes back to the question of asset allocation across all of your accounts. If you have another option in another account, it is definitely an approach to consider. In my wife's 401k, as an example, she is only invested in the S&P 500, as we try to optimize across all accounts, bearing in mind fees.

ZiziPB

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #3 on: July 30, 2015, 08:28:29 AM »


Is a Fixed Income Fund the same as a Bond Fund? The fund prospectus talks about investing in high quality bonds and wrap contracts. I don't know what wrap contracts are.
A bond is a type of a fixed income investment. But not all fixed income investments are bonds. Generally speaking, if you do not know what it is, you should not be investing in it. Google it!

Should I even put money into Fixed Income in my plan (it does have the 2nd highest fee) or should I leave that to a bond allocation in my IRA?
You have the right idea. You asset allocation should be across all your investments: tax-free (Roth), tax-deferred (401k, IRA) and taxable. If you have a better option within another type of your tax-deferred accounts, definitely look there first.


Is this Fixed Income Fund a stable value fund by any chance?  If so, it may be a very good substitute for a bond fund.  While it has a high ER, you should check if there is an indication of its yield.  MY SVF is yielding around 2.3% with no principal risk and I use it to fill a portion of my bond allocation.

Can you post a list of all available investment options with their ERs?

seattlecyclone

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #4 on: July 30, 2015, 09:03:56 AM »
How much money do you have in your IRA? If possible, I might choose to do small-cap, international stocks, and bonds in the IRA instead of the 401(k) because Vanguard charges quite a bit less for these funds.

As to the company stock, I would sell it all. Diversification is important. You already have your continued employment tied up in the future of this company. Why would you want to tie more of your financial health to their success?

GerryS

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #5 on: July 30, 2015, 10:47:09 AM »
Thanks for the responses! Here is some more info people have requested...

In response to ZiziPb
Quote
Is this Fixed Income Fund a stable value fund by any chance?  If so, it may be a very good substitute for a bond fund.  While it has a high ER, you should check if there is an indication of its yield.  MY SVF is yielding around 2.3% with no principal risk and I use it to fill a portion of my bond allocation.

Can you post a list of all available investment options with their ERs?

LifePath Retirement - ER .1880
LifePath 2020 - ER .1880
LifePath 2030 - ER .1880
LifePath 2040 - ER .1880 (my current fund)
LifePath 2050 - ER .1880
Fixed Income Fund - ER .3389
S&P500 - ER .0427
Mid-Cap - ER .0818
Small-Cap - ER .5282
International - ER .1751
Company Common Stock Fund - ER .0462
The Fixed Income Fund is designated as a GIC/Stable Value Fund. Still not sure what that is so I'm going to forego putting money into something I don't understand. I tried teasing out the Yield data but can't find it anywhere. I'm only finding investment returns for past performance, but since that means squat for future performance I'm going to pass.

In response to seattlecyclone
Quote
How much money do you have in your IRA? If possible, I might choose to do small-cap, international stocks, and bonds in the IRA instead of the 401(k) because Vanguard charges quite a bit less for these funds.

As to the company stock, I would sell it all. Diversification is important. You already have your continued employment tied up in the future of this company. Why would you want to tie more of your financial health to their success?

I have ~120K in my IRA. I think I will use the IRA for other asset-classes like bonds and international exposure and dump all of my 401(k) into the S&P Fund. See you later company stock fund. Thanks for the nice appreciation! You have all make good points about tying up with the company too closely.

Thanks for the reminder that my portfolio includes ALL assets (401k, IRA, taxable, etc.). Incorporating the wife's 401(k) into the mix should prove a nice fun challenge. I'm looking forward to it.

ZiziPB

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #6 on: July 30, 2015, 05:03:40 PM »
Well, actually, with a stable value fund, past performance is somewhat indicative of the future :-). Do some reading on stable value funds. I think they're a great alternative to bond funds and don't have the interest rate risk.

This article is pretty good http://online.barrons.com/articles/SB50001424052748704895304578499100635010968

GerryS

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Re: seeking mustachian advice on 401(k) reallocation
« Reply #7 on: July 31, 2015, 10:04:21 PM »
Thanks for the link Zizi. I'll research further.