Employer 401k and Vanguard Roth IRA Diversification

[Wayne$]

Hello all,

I just recently graduated college and started a new career with a Fortune 100 company. I'm in the process of picking investments in my 401k now, and am looking for advice. The fund options are listed below, and I am pleased with some of them and some not so much. I'm an index investor like most on here and am looking to diversify both tax-wise and with my investment choices. I've decided to contribute 20% of my salary to my 401k with the employer matching 5%. I'm contributing the max to a Vanguard Roth IRA as well. The rest left over will go into emergency savings as well as a brokerage account invested in indexes to save for a home purchase or passive income before retirement age. Here are my Mercer 401k choices and expense ratios.

Vanguard International Growth (0.35)
Ironbridge Small Cap Fund (1.15) Ouch!!!!!
Vanguard Inst. Index (0.02) I believe this is the same as Vanguard 500 index. This amazes me, as it is half the cost of 500 index       bought directly from Vanguard.
T Rowe Price Mid Cap Growth (.61)
Dodge and Cox Stock Fund (0.52)
Vanguard Morgan Growth (0.25)
Vanguard Target Retirement (0.11) Different age groups, I would stay in the appropriate one for my age.
Vanguard Wellington (0.18)
Pimco Total Return (0.46)

Originally, I planned on diversifying in my Roth and diversifying in my 401k. However, given the limited investment options for good small and mid cap indexes in my 401k I am almost convinced that I should be keeping the large cap and international pieces in my 401k (Vanguard Inst. Index and Vanguard International Growth both have lower expenses in my 401k than Vanguard Roth) and then  invest in small  and mid cap in my Roth. Additionally, even though I do not much care for target retirement funds, I think this might be a decent option in the 401k given the high expense ratios for everything else. I just wish my 401k had the same fund options as my Vanguard Roth IRA. I did not list the expense ratios of the funds available in my Roth IRA through Vanguard, because I'm sure most of you are familiar with Vanguard or at least know that most of their index funds are way cheaper than the ones listed above in my 401k. What do you guys think I should do for investment options?

[rmendpara]

Try and pick an allocation first:

- Product: equity/bonds
- Style: Stocks (Intl, US, large/mid/small cap, industries, etc), bonds (high yield, corporate, municipal, etc), and the like

Given your age, you should be very heavily weighted toward equities like >90% minimum.

Once you decide on allocation, then choose the right funds to hit that allocation.

If you can lower your expenses while still hitting your allocation, then you'll be fine.

You want your blended expense ratio to be <0.50% (as a general target, going a bit higher won't kill you). Certain funds will just cost more, like international funds generally have more expenses than US funds. Mid/small cap will usually be higher than large cap, and so on.

To summarize, first prioritize allocation, then find the cheapest way to do it. In an ideal world, you would hit the $17.5k 401k limit and $5.5k Roth limit. I don't know your salary, but assuming it's <$60k, I would prioritize contributions like this:

1) 5% minimum to 401k (to get match)
2) Maximize $5.5k in Roth - You will lose eligibility within the next decade as your salary grows above the IRS phase out limits
3) Increase your 401k contribution until you max the $17.5k limit
4) Start to invest excess funds in a taxable account (this may take a while as $23k is already quite a large chunk in #1-#3)


Overall, you have decent options in your 401k, as Vanguard, Dodge & Cox are two big players in the fund space.

At this stage of your career, and likely with a very low investment balance, it's more important how much you invest than what you invest in. If you aren't very well-versed in the investment space, just pick the Target Ret funds in both 401k and Roth, and you can rebalance once you get a better idea of how risky/safe you want to be, what you want to be exposed to, and if you want to take advantage of different economic conditions as they arise.

For what it's worth, I started full time work around 2.5 years ago, and wish I would have invested every spare dollar I had, as the markets have returned an insane amount since 2012. The key is to stay invested and keep investing no matter what... especially early in your working career.

[Another Reader]

Wellington is an excellent, boring balanced fund.  May not be what a young person just starting out is looking for.  The T. Rowe Price fund is one I have owned for years.  It's consistent and very well managed.  Compare the hypothetical growth of $10,000 over 10 years to the index.  The Dodge and Cox and Pimco funds are examples of funds that had long winning streaks but eventually fell apart.  I would avoid both now.

However, that institutional index (cheaper because it's sold and held in large blocks) is hard to beat. 

If you are considering the target date funds, be sure to understand all of the expenses.  Often there is an expense for operating the "fund of funds" on top of the underlying fund expenses.

Can't help you with the international growth.

[Joel]

Vanguard International Growth (0.35)
Vanguard Inst. Index (0.02) I believe this is the same as Vanguard 500 index. This amazes me, as it is half the cost of 500 index       bought directly from Vanguard.

Originally, I planned on diversifying in my Roth and diversifying in my 401k. However, given the limited investment options for good small and mid cap indexes in my 401k I am almost convinced that I should be keeping the large cap and international pieces in my 401k (Vanguard Inst. Index and Vanguard International Growth both have lower expenses in my 401k than Vanguard Roth) and then  invest in small  and mid cap in my Roth. What do you guys think I should do for investment options?

Personally, I would only own the Vanguard Inst. Index (large cap) in my 401k, if possible. Figure out your asset allocation, and then piece together your holdings from there, trying to minimize your expenses for your entire asset allocation. Also, I would recommend increasing your 401k contribution with any excess money so that you can get used to maximizing the contribution, and then any extra money can go to your brokerage account after you have maxed your 401k.