Author Topic: How to choose best mutual fund in company 401K?  (Read 1623 times)

StructureMan30

  • 5 O'Clock Shadow
  • *
  • Posts: 9
How to choose best mutual fund in company 401K?
« on: October 14, 2015, 08:15:41 AM »
My employer offers 26 mutual fund choices with Transamerica. How do I choose the right fund to invest in?

I'm 30 and would like to select a high risk/high potential return fund. Most of the risker funds (not heavily bond based) have expense ratios of 1.2-1.5% of assets which seems high compared to the 0.18% of the Vanguard target 2050 fund where my Roth IRA is parked. Most of the offered Transamerica funds have Morningstar ratings of 3-5 stars; I'm not sure what that means. Other than expense ratios and Morningstar ratings, how else can funds be compared?

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2232
  • Age: 39
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
Re: How to choose best mutual fund in company 401K?
« Reply #1 on: October 14, 2015, 09:25:58 AM »
I'd look at expense ratios and the internal turnover rate of the funds.  Plus of course stick as close as is practical to your investment plan.

The best DH could do at his last job was a 1.41% ER, but we invested anyways.  Once he left that job we were able to roll it over to an IRA and invest in an index fund, so despite the horrible ER we didn't pay it for long! 

Do you think you'll work there for 10+ years?  Most people would say no, so go ahead in invest in the lowest fee fund you can and plan on rolling that to Vanguard as soon as you switch jobs.

StructureMan30

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: How to choose best mutual fund in company 401K?
« Reply #2 on: October 14, 2015, 10:02:34 AM »
I'd look at expense ratios and the internal turnover rate of the funds.  Plus of course stick as close as is practical to your investment plan.

The best DH could do at his last job was a 1.41% ER, but we invested anyways.  Once he left that job we were able to roll it over to an IRA and invest in an index fund, so despite the horrible ER we didn't pay it for long! 

Do you think you'll work there for 10+ years?  Most people would say no, so go ahead in invest in the lowest fee fund you can and plan on rolling that to Vanguard as soon as you switch jobs.

Thank you Zaga. I likely won't be here for 10+ years. What is a comfortable turnover rate range?

The fund I'm eyeing has a five star Morningstar rating, expense ratio of 1.16% (on the low side of those offered), and has a turnover rate of 16%. This 16% seems high as some of the other higher expense ratio funds are 4-8%.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: How to choose best mutual fund in company 401K?
« Reply #3 on: October 14, 2015, 10:15:06 AM »
Pick the thing closest to a low-expense total market (or S&P 500) index fund. It should have the word "index" in the name and be much cheaper than most of the other stock-type funds.

If your 401K doesn't have one, complain to the committee that oversees the plan because (IMO, at least) any plan that fails to offer a basic cheap stock index fund is failing to meet its fiduciary responsibility.

Note that you should not exactly "invest in the lowest fee fund you can" as Zaga recommends because that's often a money-market fund (i.e., almost zero return). Filtering out everything that isn't a stock fund and then doing that is probably okay, though.

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2232
  • Age: 39
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
Re: How to choose best mutual fund in company 401K?
« Reply #4 on: October 14, 2015, 11:48:36 AM »
Right, which is why I included that it should be the best you can find that's within your investing plan.  Summed up, do the best you can with what you've got.  Getting low ER's is really important, but unfortunately not always possible.