Author Topic: Employee 401k w/Vanguard fund options. How should I allocate?  (Read 2414 times)

Late_Bloomer

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Hi folks. My wife has a new employer that has Vanguard fund options. Because there are several options, I'm not quite sure how to best allocate her bi weekly contributions. All the Vanguard options are:

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VMRAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VWNAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VWENX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VSMAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VEXAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VFIAX

At the moment, I set up an initial 70/20/10 split into the following funds:

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VFIAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VEXAX

https://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=002&ID=VSMAX

These three funds give coverage in all areas: large cap, mid/small cap, and international. However, the admin fees from Standard (the employee sponsored brokerage) has REALLY high fees, over 1% for each fund. So my question is, would it be wiser to just dump 100% of our allocation into a single one of these listed Vanguard funds? By doing this, we won't have diversification to combat volatility, but we will eliminate much of the fee raping since only one fund would be managed.

How would you handle your allocation in this situation?

Jack

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #1 on: August 23, 2016, 10:27:32 AM »
VEXAX and VSMAX overlap, so your 70/20/10 split has a minor "tilt" towards small-cap. I think that's a good thing, so I would leave your allocation as-is. If you don't want the tilt, 70% VFIAX / 30% VEXAX would be closer to a straight cap-weighted allocation, I think.

FYI, none of those hold international stocks. The managed funds in your list do, but they're managed so I'd avoid them. IMO, you'd be fine just holding your international in your IRA(s) instead (I do the same).

However, the admin fees from Standard (the employee sponsored brokerage) has REALLY high fees, over 1% for each fund. So my question is, would it be wiser to just dump 100% of our allocation into a single one of these listed Vanguard funds? By doing this, we won't have diversification to combat volatility, but we will eliminate much of the fee raping since only one fund would be managed.

The way I'm reading this is that your total expenses are whatever the Vanguard expense ratio is for each fund plus a ridiculous fee imposed by your brokerage. If that fee acts like an expense ratio, then it doesn't matter whether it's 1% * 100% of your assets (i.e., if you held a single fund) or 1% * 70% + 1% * 20% + 1% * 10% (i.e., if you stuck with your current plan). If, on the other hand, it were some fixed-dollar fee for each purchase (like a commission) then it would be cheaper to buy one fund instead of three.

Late_Bloomer

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #2 on: August 24, 2016, 06:44:06 AM »
Thanks for the input.

Quote
VEXAX and VSMAX overlap, so your 70/20/10 split has a minor "tilt" towards small-cap.
Yea, I didn't intend for the overlap, but I failed to realize, as you pointed out, I should of had VWNAX to replace one of those for the International portion. VWNAX has 8.9% in non U.S. stocks.

Quote
The way I'm reading this is that your total expenses are whatever the Vanguard expense ratio is for each fund plus a ridiculous fee imposed by your brokerage. If that fee acts like an expense ratio, then it doesn't matter whether it's 1% * 100% of your assets (i.e., if you held a single fund) or 1% * 70% + 1% * 20% + 1% * 10% (i.e., if you stuck with your current plan). If, on the other hand, it were some fixed-dollar fee for each purchase (like a commission) then it would be cheaper to buy one fund instead of three.

I believe you are correct. To further define my reasoning, here is an example of how the fees are charged:
Using VFIAX the fees are listed as such: Mutual Fund Expense: 0.05%
                                                               Standard's Asset Based Fee: 0.94%
                                                               Total Operating Expenses: 0.99% / $9.90 per $1,000
The example above is the lowest of all the options. The others have total Operating Expenses up to 1.12%

From my understanding, each fund / category has it's own MFE, SAB, and TOE, leading me to believe I'm being charged those amounts for each fund I hold assets in. I could be totally wrong on this thinking as well.

Jack

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #3 on: August 24, 2016, 07:38:52 AM »
Thanks for the input.

Quote
VEXAX and VSMAX overlap, so your 70/20/10 split has a minor "tilt" towards small-cap.
Yea, I didn't intend for the overlap, but I failed to realize, as you pointed out, I should of had VWNAX to replace one of those for the International portion. VWNAX has 8.9% in non U.S. stocks.

No. VWNAX is a managed fund, not an index fund. Even if it includes some international allocation, that does not mean you should buy it in order to get international. (You should only buy VWNAX if you (a) want a managed fund and (b) want to buy "value" stocks instead of "growth" stocks.)

The fund you actually want is VTIAX, which (since it's apparently not available in your 401k) you should buy in your IRA.

I believe you are correct. To further define my reasoning, here is an example of how the fees are charged:
Using VFIAX the fees are listed as such: Mutual Fund Expense: 0.05%
                                                               Standard's Asset Based Fee: 0.94%
                                                               Total Operating Expenses: 0.99% / $9.90 per $1,000
The example above is the lowest of all the options. The others have total Operating Expenses up to 1.12%

From my understanding, each fund / category has it's own MFE, SAB, and TOE, leading me to believe I'm being charged those amounts for each fund I hold assets in. I could be totally wrong on this thinking as well.

Is the "Standard's Asset Based Fee" 0.94% for every fund, or does it vary between different ones? If it's the same, then the allocation you choose doesn't matter with regards to what the broker charges.

The "Mutual Fund Expense" is Vanguard's fee, and should be noticeably higher for the managed funds than it is for the index funds.

As an aside, that 0.94% in broker charges is goddamned highway robbery! IMO, it's entirely possible that your plan sponsor is literally breaching their fiduciary responsibility and should be sued.

johnny847

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #4 on: August 24, 2016, 07:45:18 AM »
Yea, I didn't intend for the overlap, but I failed to realize, as you pointed out, I should of had VWNAX to replace one of those for the International portion. VWNAX has 8.9% in non U.S. stocks.
To add on to what Jack said, even if you had 100% of your portfolio in VWNAX you'd only have 8.9% in international stocks. Of course, you shouldn't have 100% of your portfolio in VWNAX, meaning you'd have even less in international stocks than 8.9%.

Just get an international index fund (VTIAX is my recommendation as well as Jack's) elsewhere (IRA or taxable).

Late_Bloomer

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #5 on: August 24, 2016, 09:44:44 AM »
Yes, that 0.94% Standard's Asset Based fee varies from each account holding. However, it is the same for all Vanguard options. To be more clear, as an example, that same fee is 0.84% for the "Metropolitan W Total R Bond I/International Bond" fund, which is another option. for the "T.Rowe Price Mid-Cap Growth" fund, that fee is 0.79%. Again, this is in addition to each funds individual Mutual Fund Expenses, which also vary from fund to fund.

However, You pointed out something, concerning managed vs. index'ed funds. I thought all the Vanguard options were indexed funds to begin with with. I did not know they were both, or either or. So that leads me to redefine my original question as...out of the total Vanguard funds I linked, which of those are index funds? That is really all I am after here. I am not interested in managed funds. I just did not know some where and some weren't. So irregardless of what my 70/20/10 allocation is, which of these options are index funds, and how should I allocate for just the index funds?
« Last Edit: August 24, 2016, 09:58:40 AM by Late_Bloomer »

Late_Bloomer

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #6 on: August 24, 2016, 09:58:04 AM »
Quote
The "Mutual Fund Expense" is Vanguard's fee, and should be noticeably higher for the managed funds than it is for the index funds.

Well, going over the information, I guess I can answer my own question about index vs. managed.

The MFE for all Vanguard options:

1. Windsor II Adm/Large Cap Value...0.28%
2. 500 Index Admiral/Large Cap Blend...0.05%
3. Morgan Growth Adm/Large Cap Growth...0.26%
4. Extd. Mkt Idx Adm/Mid Cap Blend...0.10%
5. Sm Cap Idx Adm/Small Cap...0.09%
6. Wellington Adm/Balanced...0.18%

So based on these, Options 2, and 5 are the lowest. I would assume those are Index? I just didn't see any info on each funds information page for the MorningStar Investment Profile that distinguished between a managed vs. Index fund.

Quote
As an aside, that 0.94% in broker charges is goddamned highway robbery! IMO, it's entirely possible that your plan sponsor is literally breaching their fiduciary responsibility and should be sued.

I agree with you on that. However, this is my Wife's employer and and there isn't much I can do personally about it. I'm the one setting up the account allocation for her because she doesn't know how to do it or why. And yes, I have gone over investing with her and she agrees to doing it, but she is leaving those decisions up to me. Hence, the main reason I am asking advice on how to best navigate her employers fees to give us the best option. I know they are taking advantage of their employees. They are a credit union after all. I had another thread pertaining to this issue a month or so back and from that I decided to not roll her old employer 401k into this new company. I have already rolled it over to Vanguard IRA. However, we still need to invest in her employee 401k for all the same reasons anyone else would, namely, tax advantage. Just trying to make sure we invest in the right index funds and not get blind sided, as I'm sure the rest of her company employees are experiencing without even realizing it.


« Last Edit: August 24, 2016, 10:10:37 AM by Late_Bloomer »

johnny847

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #7 on: August 24, 2016, 10:15:45 AM »
Quote
The "Mutual Fund Expense" is Vanguard's fee, and should be noticeably higher for the managed funds than it is for the index funds.

Well, going over the information, I guess I can answer my own question about index vs. managed.

The MFE for all Vanguard options:

1. Windsor II Adm/Large Cap Value...0.28%
2. 500 Index Admiral/Large Cap Blend...0.05%
3. Morgan Growth Adm/Large Cap Growth...0.26%
4. Extd. Mkt Idx Adm/Mid Cap Blend...0.10%
5. Sm Cap Idx Adm/Small Cap...0.09%
6. Wellington Adm/Balanced...0.18%

So based on these, Options 2, and 5 are the lowest. I would assume those are Index? I just didn't see any info on each funds information page for the MorningStar Investment Profile that distinguished between a managed vs. Index fund.

Quote
As an aside, that 0.94% in broker charges is goddamned highway robbery! IMO, it's entirely possible that your plan sponsor is literally breaching their fiduciary responsibility and should be sued.

I agree with you on that. However, this is my Wife's employer and and there isn't much I can do personally about it. I'm the one setting up the account allocation for her because she doesn't know how to do it or why. And yes, I have gone over investing with her and she agrees to doing it, but she is leaving those decisions up to me. Hence, the main reason I am asking advice on how to best navigate her employers fees to give us the best option. I know they are taking advantage of their employees. They are a credit union after all. I had another thread pertaining to this issue a month or so back and from that I decided to not roll her old employer 401k into this new company. I have already rolled it over to Vanguard IRA. However, we still need to invest in her employee 401k for all the same reasons anyone else would, namely, tax advantage. Just trying to make sure we invest in the right index funds and not get blind sided, as I'm sure the rest of her company employees are experiencing without even realizing it.

In this case you can easily tell from the name. Funds 2, 4, and 5 have Idx in the name, which stands for index.

Jack

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #8 on: August 24, 2016, 10:39:00 AM »
So that leads me to redefine my original question as...out of the total Vanguard funds I linked, which of those are index funds?

Vanguard index funds tend to have the word "Index" (or "Idx") in the name. (The only pseudo-exception I know of is Vanguard target date funds. They are constructed out of index funds, but have a human choosing how the ratios of those underlying funds changes over time, so they're sort of a special case.)

In general, you can tell whether a fund is index or managed by reading the prospectus.



By the way: it's entirely possible that you do have an international index fund available, and that it's just being provided by a company other than Vanguard. Please post the entire list of funds available in this 401k plan and let us check for you.

badbear

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #9 on: August 24, 2016, 10:40:49 AM »
You listed all the Vanguard options in the 401k, but are there any relatively low-fee non-Vanguard options? Perhaps non-Vanguard index funds? Vanguard is great, but often you have to work with what you have in your 401k, so it may be helpful to look at what else is available. Unfortunately, the nearly 1% asset-based fee imposed by the brokerage would make even the cheapest fund expensive to invest in. Hopefully the employer at least matches some contributions. Likely, even with these high 401k fees, it would be advantageous to get the tax advantage rather than investing in a taxable brokerage account.

If you are looking to approximate VTSAX (Total Stock Market) with the funds you have in the 401k, you can do:

80% 500 Index
20% Extended Market Index

Late_Bloomer

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Re: Employee 401k w/Vanguard fund options. How should I allocate?
« Reply #10 on: August 24, 2016, 08:38:41 PM »
Thanks again for all the advice. I think I have enough to make a decision I can live with. Regarding International and other fund offerings, yes, there are others, but they are all much higher than Vanguard, in both fund expenses and Standard's Asset based Fee. Not to sound like I only advocate Vanguard, but they truly are the cheapest of all the options available.