Author Topic: Yet another 401(k) allocation question  (Read 2812 times)

kythuen

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Yet another 401(k) allocation question
« on: January 02, 2013, 09:14:12 AM »
I've been reading as extensively as I can in this forum, bogleheads, and a couple of others, to determine what I should do with my company's not-fantastic Fidelity 401(k) options. 

Here's my situation:

1) I've just started getting serious about getting out of debt and getting ready to retire; I've been on these boards (and other similar ones!) about a month.  I'm on the expense-reduction train already, and I've read enough to know where I can and should cut down, I think.  :)

2) Because my choices are so limited, I'm contributing to my 401(k) only up to my employer match.  Starting now I'll be maxing my Roth IRA at Vanguard each year (including 2012), and my choices will be far clearer there.

3) I'm paying off a new car loan prior to selling the car; that loan is at a high interest rate, so I'm planning to pay it off entirely by the end of August.  After that, it's just me, the bike, and maybe zip car.

4) I've got about 60K in student loan debt to pay off, across two different loans (6K and 54k), both of which are at around 4.25% interest.  Both are currently in forbearance until August. Once the car is paid off and sold, I'll use part of that money to knock out the smaller loan completely and the rest will go to my 2013 Roth.

While I'm tackling everything else, I want to put my 401(k) on autopilot, but my choices seem to be pretty uninspiring.  I could take one of the target funds - it would be the easiest for me to manage - but they're all in the .7 ER range, have low ratings, and haven't performed as well as the S&P index option has. On the other hand, the expense ratios of the four choices below add up to 1.7% - gah.

Right now I'm considering:

1. A basic S&P index fund, ER .21 (~60%)
2. A basic international equities index, ER .5 (~25%)
3. A US Bond fund, ER .51 (~7.5%)
4. An inflation-adjusted bond fund, ER .48 (7.5%)

I'm not happy with the expense ratios of the last three, but they're the lowest-ER options, and I don't have a lot of diversification options available to me.  So maybe what I should be thinking about instead is just putting everything in the 401(k) into the S&P index, and deal with diversification issues through the Vanguard Roth?

I'd appreciate any thoughts - happy to add information if there are questions.



Zaga

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Re: Yet another 401(k) allocation question
« Reply #1 on: January 02, 2013, 09:43:00 AM »
I think it would be a fine idea to have all of your 401-K in the S&P index fund, then fill in the rest of your allocation with your Roth.  We do something similar, but with more accounts.  We try and keep as many accounts to just one fund as possible.

Any reason why you can't sell the car now?

Another Reader

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Re: Yet another 401(k) allocation question
« Reply #2 on: January 02, 2013, 09:48:09 AM »
Expense ratios are not additive.  You would take a weighted average to determine your expense ratio.  With your proposed allocation, you would calculate the overall expense ratio as follows:

(0.6 x 0.21) + (0.25 x 0.5) + (0.075 x 0.51) + (0.075 x 0.48) = 0.32525

That's not awful.  Compare the performance of these funds to their equivalents at Vanguard to see if one has an advantage over the other in each asset class.  The increased ER may wash out, or not.  I look at the growth of $10,000 over the last 10 years as one of the more important indicators.

Personally, I would not put everything in an S&P 500 index fund.  If I recall, you are about 40, so in your shoes I would probably make similar selections, as long as none of the funds are real stinkers.  You can adjust your asset allocation with the picks in your IRA.  And, if the funds in the 401(k) are decent performers, I would contribute what I could afford above the match and still meet all my other goals.  The tax benefits far outweigh a few basis points in an expense ratio.

kythuen

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Re: Yet another 401(k) allocation question
« Reply #3 on: January 02, 2013, 11:24:26 AM »
Zaga - thanks! Re: the car, since the loan is with Toyota and not a bank, making the trade seems more complicated.  From what I've read, I'd need a particularly understanding buyer who isn't in a huge hurry to get the title. I'm not averse to trying to sell sooner, I'm just new at the car-selling game and it seems easier to sell if I already own the car outright. 

Another Reader - Thanks for the info on the weighted average, that makes a difference.  You're right about my age - I think I'm a little more risk-tolerant than most people in my bracket, since I know I have some catching up to do, but not so much that I want all my eggs in a single basket.  Or single basket of baskets, as it were... 

frugalcoconut

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Re: Yet another 401(k) allocation question
« Reply #4 on: January 06, 2013, 07:19:36 PM »
Due to the limited investment choices in my Roth 401k, I put all my money there into the S&P 500 index fund too ... all my other diversification is done through the Roth IRA.  In my employer-sponsored retirement plan, all of the funds are actively managed except for that one index fund option (albeit a really good one with a 0.02% ratio <-- not a typo).