Author Topic: Crappy 401k, avoid mid-cap allocation?  (Read 6642 times)

Mr. Green

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Crappy 401k, avoid mid-cap allocation?
« on: February 03, 2015, 11:44:14 AM »
I work for a small company (for about two more years) and our 401k choices are pretty shitty. I'm stuck with this until I leave the company and then I will rollover to Vanguard. Ideally I would invest equally in large, mid, and small cap stocks (since there is no total market option). I want no international exposure beyond what would be in those funds. My expense fee options are as follows:

S&P 500 Index Fund (no public ticker) - 0.71%
T. Rowe Price Mid Cap Value Fund (RRMVX) - 1.31%
Deutsche Mid Cap Growth Fund (SMCAX) - 1.26%
Small Cap Index Fund (no public ticker) - 0.97%

I don't think the added fees are worth the exposure to mid-caps which typically perform very similarly to small caps. Are there any considerations I'm missing that might make it worthwhile to put money there?

seattlecyclone

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #1 on: February 03, 2015, 11:50:43 AM »
Do you have any investments outside of the 401(k)? If so, you may want to just put your whole 401(k) in the S&P 500 fund. Then in a different account buy some VEXAX (total market minus S&P 500) equal to about 20% of your 401(k) balance. This way you'll approximate a total market fund. Or if you want to tilt toward small-cap and mid-cap stocks, buy more than 20%.

Cromacster

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #2 on: February 03, 2015, 11:51:53 AM »
Do you have a set asset allocation or Investment Policy Statement?

There is really no reason you need to hit your allocation in one spot.  If you have shitty options in your 401(k), choose the best of the worst and get the rest of your allocation elsewhere. 

Personally I would only invest in the S&P500 in the 401(k) and I would utilize IRA and after tax investment to fill the rest of my allocation.

Update:

Errm yea, what he said...

Do you have any investments outside of the 401(k)? If so, you may want to just put your whole 401(k) in the S&P 500 fund. Then in a different account buy some VEXAX (total market minus S&P 500) equal to about 20% of your 401(k) balance. This way you'll approximate a total market fund. Or if you want to tilt toward small-cap and mid-cap stocks, buy more than 20%.

seattlecyclone

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #3 on: February 03, 2015, 12:01:01 PM »
For more info about the extended market fund and why you might purchase one, see this Bogleheads wiki page. In general it's not a fund you would want to buy on its own, but if your 401(k)'s least bad investment option is an S&P 500 fund, the extended market fund will bring some balance to your portfolio.

I misspoke earlier about the amount to purchase. You'll want an 80/20 ratio of S&P 500 to VEXAX to essentially build your own total market fund, which means you'll need to invest an amount equal to 25% of your 401(k) balance, not 20%.

Mr. Green

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #4 on: February 03, 2015, 12:17:28 PM »
Ah! That answer seems so smart and simple. Why didn't I think of that? Glad I asked. The 401k has 140k in it and I have an IRA with 80k in that. I will also be investing heavily in a brokerage account this year (80k) so by the end of the year the IRA/Brokerage balance should be close to the 401k balance.

Still getting schooled on how to invest my money. I love it!

cashstasherat23

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #5 on: February 03, 2015, 12:32:12 PM »
This may be a stupid question, but what makes a crappy 401K?

I just started investing in my first 401K this year, and had my dad help me decide what to invest in. I am hoping to learn more myself so that I can be sure that my money is working for me the way I want it to. This post intrigued me, as I did not know there was such a thing as a bad 401K.

Why are the options that the OP listed bad? I myself am invested in a Midcap S&P 400 Index, SmallCap S&P 600 Index, T. Rowe Price Blue Chip Growth Adv Fund along with a few international funds and a real estate account.

I can make a separate post if needed, but was just curious about what I should be looking for!

Mr. Green

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #6 on: February 03, 2015, 12:43:05 PM »
This may be a stupid question, but what makes a crappy 401K?

I just started investing in my first 401K this year, and had my dad help me decide what to invest in. I am hoping to learn more myself so that I can be sure that my money is working for me the way I want it to. This post intrigued me, as I did not know there was such a thing as a bad 401K.

Why are the options that the OP listed bad? I myself am invested in a Midcap S&P 400 Index, SmallCap S&P 600 Index, T. Rowe Price Blue Chip Growth Adv Fund along with a few international funds and a real estate account.

I can make a separate post if needed, but was just curious about what I should be looking for!
The fund options are what makes it crappy. The lowest expense fee fund I have available to me is an S&P 500 Index fund at 0.71%. They're charging almost a full percent for nothing, because an index fund just mirrors the S&P 500! There's no active management in that. By contrast, Vanguard's S&P 500 index fund charges a 0.05% fee for their Admiral Shares class fund (minimum $10,000 investment). That's 2/3 of a percent I'm losing every year because my 401k options suck.

To show what a big deal that is, take $10,000 and run the investment out 30 years at 6% vs. 7%. The difference is huge, almost 50%. So I would lose a ton of money (hundreds of thousands of dollars) in the long run if I kept my 401k until retirement. This is why I will be rolling over the Vanguard in 2 years.
« Last Edit: February 03, 2015, 12:45:32 PM by wdanner »

cashstasherat23

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #7 on: February 03, 2015, 12:56:01 PM »
WOW, I am glad I asked. Just took a look at the expense fees on the funds I have...the lowest is .61, but the average is more around 1.25%!

Since I am just starting out, and only have about $2.5K in the 401K now, I am not sure if rolling anything over to Vanguard makes sense. All I have read so far indicates that maxing out the 401K is the best first step.

J Boogie

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #8 on: February 03, 2015, 01:16:52 PM »
Are you maxing out your employer match or maxing out your yearly contribution of 18k?

I'd max out the employer match on whatever decent fund has the lowest fee, but when fees are over 1% I'd look elsewhere.  Does your company offer an HSA? If not, you can open up a Roth and invest in almost anything.

As far as your current 2.5k in the 401k, some companies allow rollovers during your service years and some don't - worth looking into as that stash grows.

Mr. Green

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #9 on: February 03, 2015, 02:15:27 PM »
WOW, I am glad I asked. Just took a look at the expense fees on the funds I have...the lowest is .61, but the average is more around 1.25%!

Since I am just starting out, and only have about $2.5K in the 401K now, I am not sure if rolling anything over to Vanguard makes sense. All I have read so far indicates that maxing out the 401K is the best first step.
Your 401k plan sounds incredibly similar to my own. I think the general consensus is that the tax savings on maxing out your 401k still beats lower fees in an after-tax IRA. You definitely want to get your employer match. However, if you make less than $116,000 in 2015 (for a single person) you may consider a Vanguard Roth IRA before contributing more to your 401k. If you were going to max out the 401k regardless and still invest more money, some higher fees might just be the price you have to pay to take advantage of the before-tax savings in your 401k. Most 401ks do not allow rollovers while you're still with your employer (called an in-service distribution) so you would have to quit your job to be able to move the money to a Rollover IRA in that case.

In my particular scenario, I'm planning on leaving my job in a few years so I will rollover my 401k to a Vanguard IRA then. In your case, you may find doing the same is the first, best opportunity you have to get 401k funds into a lower expense fee IRA. If you do eventually leave your current employer I definitely wouldn't leave the money in your 401k since you have higher fees.

cashstasherat23

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #10 on: February 03, 2015, 02:23:12 PM »
Thanks for your feedback, wdanner and J Welterweight!

To answer your questions:

I will make WAY less than $116K in 2015. I am not yet maxing out my 401K, but instead contributing about 11% and was trying to increase that number as the year goes on. As for my employer, they contribute 3% of my salary regardless of whether I contribute or not. I also am 100% vested, not sure if that matters.

When you say HSA, are you referring to the healthcare savings account? We only have an FSA. 

My biggest goal for this year is to completely pay off my student loans, about $23K, so I will not be maxing out my 401K, but want to make sure the contributions that I am making are the smartest decision I can make. Next year I will hopefully switch to maxing out my 401K, or perhaps not, if a Roth is a better idea for me in my tax bracket.

J Boogie

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #11 on: February 03, 2015, 02:37:21 PM »
Yes - HSA is a health savings account.  It's a good place to invest as it doesn't get taxed coming in or going out.  An FSA is a use-it-or-lose-it deal, no investment potential there.

I'd scale your 11% down to 3% and get those loans paid off quicker.

If you don't want to miss out on the compound interest growth, and you still have leftover money after aggressively attacking your loans, putting 5 grand a year in a Roth IRA could be a good move.  You can open one up with Vanguard with low minimums and no transaction fees on automatic recurring investment amounts over $50.

Best of luck w/ everything! I talk finance w/ my dad a lot as well.

ImCheap

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #12 on: February 03, 2015, 02:37:56 PM »
I have a somewhat crappy work plan, not as bad as yours however. If you really sit down and look at the end numbers the difference between a large cap fund (something like a S&P 500) and a Total Stock Market fund its not really that much different in terms of gains and volatility. Many people look at them as equals when tax lost harvesting.

As others have noted use the best funds you have over all your account and look at it a whole. 

cashstasherat23

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #13 on: February 03, 2015, 02:53:58 PM »
I have a somewhat crappy work plan, not as bad as yours however. If you really sit down and look at the end numbers the difference between a large cap fund (something like a S&P 500) and a Total Stock Market fund its not really that much different in terms of gains and volatility. Many people look at them as equals when tax lost harvesting.

As others have noted use the best funds you have over all your account and look at it a whole.

Ha! and here I was thinking I was all set with a great plan...so glad I found MMM and am learning about this kind of thing!

Not sure what tax lost harvesting means, but if you mean looking at my whole 401K account, the fees are pretty high all across the board!


ImCheap

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #14 on: February 04, 2015, 09:03:22 AM »
I have a somewhat crappy work plan, not as bad as yours however. If you really sit down and look at the end numbers the difference between a large cap fund (something like a S&P 500) and a Total Stock Market fund its not really that much different in terms of gains and volatility. Many people look at them as equals when tax lost harvesting.

As others have noted use the best funds you have over all your account and look at it a whole.

Ha! and here I was thinking I was all set with a great plan...so glad I found MMM and am learning about this kind of thing!

Not sure what tax lost harvesting means, but if you mean looking at my whole 401K account, the fees are pretty high all across the board!

I did not explain it that well, when I said whole, I mean you treat all your accounts as one big pile of dollars. After you know your asset allocation you hold those assets as efficient as you can based on fees and taxes.

Between my spouse and I we have 10 accounts for our long term retirement pile, some great plans, some plans stink, you have to work with what you got to keep fees and taxes in check.

Tax loss harvesting could be complete new discussions, its done in a taxable account to lock in gains or losses to minimum your tax liabilities.
« Last Edit: February 04, 2015, 09:06:44 AM by ImCheap »

Mr. Green

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #15 on: February 04, 2015, 09:11:48 AM »
I have a somewhat crappy work plan, not as bad as yours however. If you really sit down and look at the end numbers the difference between a large cap fund (something like a S&P 500) and a Total Stock Market fund its not really that much different in terms of gains and volatility. Many people look at them as equals when tax lost harvesting.

As others have noted use the best funds you have over all your account and look at it a whole.

Ha! and here I was thinking I was all set with a great plan...so glad I found MMM and am learning about this kind of thing!

Not sure what tax lost harvesting means, but if you mean looking at my whole 401K account, the fees are pretty high all across the board!

I did not explain it that well, when I said whole, I mean you treat all your accounts as one big pile of dollars. After you know your asset allocation you hold those assets as efficient as you can based on fees and taxes.

Between my spouse and I we have 10 accounts for our long term retirement pile, some great plans, some plans stink, you have to work with what you got to keep fees and taxes in check.

Tax loss harvesting could be complete new discussions, its done in a taxable account to lock in gains or losses to minimum your tax liabilities.
10 accounts?! Is that by design? I rolled all my old 401ks into Vanguard and then there's my current 401k. For my wife and I that's 4. That's a lot to keep track of!

seattlecyclone

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #16 on: February 04, 2015, 09:17:29 AM »
It's a pain to deal with that many accounts, but sometimes it just can't be helped. My wife and I each have a 401(k), an HSA, and a Roth IRA, and an account for our company stock plans. We also have a joint taxable brokerage account. My wife has an old Roth IRA with Schwab that we should transfer to Vanguard eventually to consolidate things but it hasn't been a high priority because Schwab has perfectly fine low-fee no-commission ETFs to invest in. So I guess that's ten accounts for us too!

James

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #17 on: February 04, 2015, 10:11:09 AM »
10 accounts?! Is that by design? I rolled all my old 401ks into Vanguard and then there's my current 401k. For my wife and I that's 4. That's a lot to keep track of!

You can get a lot of accounts pretty fast. I have a Roth for me, Roth for my wife, Rollover IRA, college account for each of three kids, 403B, Roth 403B, and separate ERP account my employer contributes to. I used to have two other accounts, a 401k from a past job and an account that was created when I cashed out of a pension plan, but those have been rolled into the rollover IRA. I wish I could combine more of them...

Mr. Green

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #18 on: February 04, 2015, 10:18:23 AM »
10 accounts?! Is that by design? I rolled all my old 401ks into Vanguard and then there's my current 401k. For my wife and I that's 4. That's a lot to keep track of!

You can get a lot of accounts pretty fast. I have a Roth for me, Roth for my wife, Rollover IRA, college account for each of three kids, 403B, Roth 403B, and separate ERP account my employer contributes to. I used to have two other accounts, a 401k from a past job and an account that was created when I cashed out of a pension plan, but those have been rolled into the rollover IRA. I wish I could combine more of them...
Ah. I just consider all my Vanguard accounts (Brokerage, IRA) one account since the platform makes it feel that way and you have access to all the same stuff.

ImCheap

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Re: Crappy 401k, avoid mid-cap allocation?
« Reply #19 on: February 04, 2015, 02:26:38 PM »
10 accounts?! Is that by design? I rolled all my old 401ks into Vanguard and then there's my current 401k. For my wife and I that's 4. That's a lot to keep track of!

You can get a lot of accounts pretty fast. I have a Roth for me, Roth for my wife, Rollover IRA, college account for each of three kids, 403B, Roth 403B, and separate ERP account my employer contributes to. I used to have two other accounts, a 401k from a past job and an account that was created when I cashed out of a pension plan, but those have been rolled into the rollover IRA. I wish I could combine more of them...

Yeah the accounts add up really fast, its a pet peeve of mine, I think things could be so much simpler, lets just give everyone one big bucket of space to invest in and call it a day.

Here is our list:

tIRA (his)
tIRA (hers)
rIRA (his)
rIRA (hers)
SAR-SEP (his)
403B (hers)
457 (hers)
Treasury Direct (hers)
Treasury Direct (his)
Brokerage (his and hers)

On top of the above we have a Pension plan and two Social Security accounts, not much to do in these but keep track of the login information being we are still adding to them!

Some of the accounts are combined with one login so its not to bad. I wish Quicken could download all the accounts information but it can't so I keep track of our allocation with a spread sheet. Its so much fun when you only have one fund that's worth the crap in a work account.