Author Topic: Exchanging investments out of target date funds-any consequences to consider?  (Read 330 times)

PNW_FIRE

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Newbie investor here and I would appreciate some help: I want to change my Traditional 401K and Roth IRA investments out of target date funds to individual funds with better expense ratios.

I apologize for what I’m sure is a very basic question, but are there any consequences/things I need to consider when doing this? I’ve never exchanged investments within my 401K nor my Roth IRA, so I don’t know if it’s just as simple as logging into my account, clicking on the “exchange” button and selecting the new funds…or are there any fees, tax consequences, etc. that I should be aware of when exchanging my investments?

If it matters, for my 401K, I'm trying to switch out of American Funds 2040 Target Date Retirement (ER of 1.18%) to some lower cost Vanguard options that I have available (VFIAX and VBTLX) for a slightly better ER of 0.85%. My Roth IRA is with Vanguard, and I'd be switching out of Vanguard Target Retirement 2040 to VTSAX.

Thanks!

MDM

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...it’s just as simple as logging into my account, clicking on the “exchange” button and selecting the new funds
Probably just that.
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…or are there any fees, tax consequences, etc. that I should be aware of when exchanging my investments?
No tax consequences (other than the remote chance you may have a wash sale if you are buying/selling the same fund in a taxable account that you are selling/buying in the 401k or IRA, within 30 days of each other).  Don't know if your specific 401k has transactions fees.

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If it matters, for my 401K, I'm trying to switch out of American Funds 2040 Target Date Retirement (ER of 1.18%) to some lower cost Vanguard options that I have available (VFIAX and VBTLX) for a slightly better ER of 0.85%. My Roth IRA is with Vanguard, and I'd be switching out of Vanguard Target Retirement 2040 to VTSAX.
Only matters to the extent that, if you are changing your asset allocation, this is a conscious choice and you expect to keep the new AA for many years.

MustacheAndaHalf

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...
If it matters, for my 401K, I'm trying to switch out of American Funds 2040 Target Date Retirement (ER of 1.18%) to some lower cost Vanguard options that I have available (VFIAX and VBTLX) for a slightly better ER of 0.85%. My Roth IRA is with Vanguard, and I'd be switching out of Vanguard Target Retirement 2040 to VTSAX.
Both VFIAX and VTSAX have a 0.04% expense ratio, according to Vanguard:
https://investor.vanguard.com/mutual-funds/profile/VFIAX
https://investor.vanguard.com/mutual-funds/profile/VTSAX

Your 401(k) plan is lumping 0.80% of plan expenses into the fund expense ratio.  That's a very high expense, and it may be worth complaining to the HR or benefits department of your employer.  You are owed a fiduciary duty by your employer - they are obligated to seek out less expensive plans.  But if nobody calls their bluff, they can pick the first 0.80% plan that comes along.

You might want to poke around a little in Vanguard's Retirement Plan offerings, so you can help convince your company they have a better choice available.
https://investor.vanguard.com/small-business-retirement-plans/self-employed

But back to your Roth IRA, you're only paying 0.14% in expense ratio for Vanguard Target Retirement 2040.  It sounds like you prefer to be hands off, so a target date fund might be better.  Over the next 20 years, having a 0.14% vs 0.04% expense ratio adds up to 2% of the account value.  Not only does the target date fund contain international stocks (which VTSAX doesn't), but it automatically shifts towards a higher bond allocation as you approach retirement.
https://investor.vanguard.com/mutual-funds/profile/VFORX

PNW_FIRE

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    ...it’s just as simple as logging into my account, clicking on the “exchange” button and selecting the new funds

Probably just that.

Thanks, MDM for helping clarify what I thought was the case. Good to know it should be that easy!

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Your 401(k) plan is lumping 0.80% of plan expenses into the fund expense ratio.  That's a very high expense, and it may be worth complaining to the HR or benefits department of your employer.

Yes, they are lumping on .80% to all their available funds. It's crazy but I don't feel like I currently have the ability to successfully raise this issue with HR. Hopefully it's something that I can address with colleagues in the coming year.

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But back to your Roth IRA, you're only paying 0.14% in expense ratio for Vanguard Target Retirement 2040.  It sounds like you prefer to be hands off, so a target date fund might be better.

I definitely prefer to be hands off. I agree that the ER on the Vanguard target date fund in my Roth IRA isn't bad and I'd be fine keeping it, however I thought it might make sense to switch that account to an individual fund (or funds--VTSAX and VTWSX for the international explosure) if I'm switching my 401K to individual funds so that I could better manage my AA across my portfolio...But maybe it doesn't really matter that much? I've previously read advice to avoid mixing target date funds with other investments, but if it really doesn't matter that much in my case from an AA management perspective, I'd be happy to keep my Roth IRA as is.