Author Topic: Just got 401K mailer exposing fees-would love input on changes  (Read 4724 times)

April

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Just got 401K mailer exposing fees-would love input on changes
« on: October 08, 2012, 03:00:28 PM »
Mustachians:

I received a mailer sharing the fees expense ratios of the investment options available to me under my plan, which is through Mercer.

I was shocked to see the expense ratios vary from a low of .11% to 1.37%  Even more interesting was the lack of a recognizable correlation between the expense ratio and the performance.  For example, the Vanguard VAIPX had the .11% annual expense ratio and a 1 yr return of 13.29% where as my Morgan Stanley Small Company Growth MSSMX had the ratio of 1.37% with a 1 yr return of -9.28%!

Needless to say, this has made me question the investments currently in my portfolio.  What I'd like to do is re-allocate my current balance and future contributions as follows based on my newly learned information from the mailer:

Putnam Bond Index Fund-.38% Expense Ratio. 1 yr return of 7.5%  I'd like to allocate 10% here
Vanguard Inflation Protected Securities Fund Admiral- .11% ER, 1 yr return of 13.29%, allocate 50%
Vanguard Wellington Fund Admiral Class- .19% ER, 1 yr return of 3.95%, i'd like to allocate 30%
Putnam Stable Value Fund- .35% ER, 1 yr return of 3.5%, i'd like to allocate 10%

I have two concerns before I pull the trigger:
  • I had previously had the funds divided between 10 different investments. Now there are only 4. Is this "putting all my eggs in too few baskets?"
    Even though the returns looks better than most with the higher fees, am I really shooting myself in the foot by doing this?  In other words, are my elections above "too conservative" to expect any real growth?

For some background, I'm 26 and currently have around 47k in my 401k.  I contribute 25% of my salary and have a 6% employer match. I make 60k/yr before taxes[/list]

grantmeaname

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #1 on: October 08, 2012, 03:32:19 PM »
Your Wellington fund is two-thirds stocks, which means that your overall portfolio allocation is something like 20% stocks and 80% bonds and money market. That's a pretty unsuitable allocation for just about anything, really. If you're really, really risk averse you may think about only 60% stocks and 40% bonds, but to have more bonds than stocks or even four times as many bonds as stocks is really shooting yourself in the foot--not only are you not adequately diversified, but you're likely to prevent your net worth from compounding over the rest of your career and retirement.

If I were you, I would go over to the Bogleheads wiki and start with something like the Investing Start-up kit (which is not a product someone's selling you, no matter how much it sounds like it. You could also start with MMM's articles about asset allocation and index investing investing, if you'd prefer them to bogleheads. Whatever route you choose, you'll find that a couple hours' research reading around on the internet will give you a good summary of the various asset classes and what proportions you need them in to be successful.

hoppy08520

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #2 on: October 08, 2012, 07:54:08 PM »
April, good advice from grantmeaname. Bogleheads.org is the best investing site there is and has mustachian sensibilities.

A few points:
* Overall, if these are the total, total expenses, you have a pretty good 401(k) plan compared to a lot of people. For example, the expense ratio for your S&P 500 Index fund is 0.26% which is pretty low, as are the expense ratios for the Total Bond Fund (Y) and the Treasury Inflation-Protected Securities (TIPS) fund (VAIPX).
* You can't really compare the returns of Vanguard TIPS (VAIPX) with a small company growth fun (MSSMX) because these are entirely different asset classes.
* You mention you're contributing 25% of your $60K salary, which would be $15,000. Tip: unless doing so would cause you to lose some employer matching, you're better off contributing $5,000 to a deductible Traditional IRA (where you will pay lower fees and have better investment options) and $10,000 to your 401(k) than putting all $15,000 into the 401(k). Given that your marginal tax rate (assuming you're single) is 25% Federal plus around 3% AZ, I'd favor deductible IRA contributions over Roth IRA contributions. (See: http://iracontributionlimits2010.com/ira-contribution-cheat-sheet-2012/). From a tax perspective, there would be no difference (either way, you're reducing your taxable income by $15,000) but you'd have better and cheaper options if you had an IRA at Vanguard.
* Think first about what you want your asset allocation to be (what percent stocks and bonds), and then pick the best and most appropriate funds for those asset classes with an eye toward fund expenses.
* If you want a really good, but simple, 100-page starter book on investing, you couldn't do much better than "Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less" (http://www.amazon.com/Investing-Made-Simple-Index-Explained/dp/0981454240/ref=sr_1_2?ie=UTF8&qid=1349745108&sr=8-2&keywords=oblivious+investor). The next book to read after that is the Bogleheads Guide to Investing.
* You have to decide for yourself what you want your asset allocation to be, but I agree with granmeaname that for a 26-year-old, being 20% stocks and 80% bonds is pretty conservative.
* This may seem counter-intuitive, but don't worry about past returns of funds. Historical returns rarely augur the future. Choose your asset allocation, choose the best/cheapest funds that fit it, and go with that.
* Don't think "more funds means more diversification". You have to look at what's in the funds. Often, people who haphazardly pick a mismatched bunch of funds wind up accidentally with too much in one sector and too little in another.

My suggestion:

1. First, determine your asset allocation between stocks and bonds. A good rule of thumb is "your age in bonds". Since you seem to be a bit on the conservative side, let's say 70% stocks and 30% bonds. You need to pick a number you're comfortable with and can stick with when (not if, but when) we have a fall in the stock market. You need to stick with it because the biggest mistake investors make in a bear market is to panic, sell their stocks for cash (which locks in your losses, i.e. "selling low"), and then sit out the rebound from the sidelines. Then they get back into the market when stocks are high again (meaning they're "buying high"). Don't make this mistake by trying to time the market, which rarely works. Instead, pick an allocation you can stick with it and stay the course.

2. Within stocks, what percentage US and what percentage International? Per Vanguard, a reasonable default is 70% US and 30% international.

That means (roughly):

50% US Stocks
20% International Stocks
30% bonds

With your choices, I'd go with:

US Stocks:
40% - S&P 500 Index Fund (Ticker? F?)
10% - DFA US Targeted Value (DFFVX)

International:
20% - Am Funds EuroPacific Growth (REREX)

Bonds:
30% - Putnam Bond Index Trust Fund (Y)

These funds are the closest you can get to an index fund portfolio, which is the most inexpensive and most broadly diversified portfolio you can have.

With this portfolio, with your US Stock allocation, you have 80% of it in the S&P 500 index fund, which is that sector's (large cap) share of the total US stock market. The other 20% is in the DFA Small Cap Value fund, which operates/performs close to how an index fund does and has low expenses. Roughly 20% of the US stock market is in mid/small capitalization stocks, so we keep that percentage.

International funds - most 401(k) plans don't have the best international fund and your plan is no exception. As you grow your IRA, I'd hold as much Vanguard Total International Stock Market Index Fund (VGTSX) in your IRA as you can, which is a better and more diversified (and cheaper) fund than REREX. As your IRA grows, you can lower your international allocation proportionally in your 401(k). Just keep roughly the same overall ratio across your entire portfolio (401k + IRA). But for now, REREX is probably your best bet out of the 3 global/international funds in your plan. MALOX is an odd fund that is intended to be an all-in-one fund, with some US stocks, International stocks, and bonds. I wouldn't go with that.

Bonds - I recommend the Putnam bond fund because it tracks the Barclay's index. Per the fund prospectus: "The fund seeks investment results that correspond to the total return of bonds as represented by the Barclays Capital U.S. Aggregate Bond Index." (https://content.putnam.com/institutional/pdf/dcio/BondIndex_Y.pdf) That's basically the gold standard of bond funds. If you're feeling conservative, you could supplement this with the TIPS fund (VAIPX) or the stable value fund, perhaps 1/3rd each (10%, 10%, 10%). The fact that the TIPS fund is a bit cheaper than the Putnam Y fund makes the case for splitting bond funds a bit stronger.

If you want to be more conservative, then just adjust the ratios. For example, 60% stocks and 40% bond would be:

42% US Stock (33% S&P 500 + 9 % DFA Small Cap Value)
18% International Stock
40% bonds

April

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #3 on: October 09, 2012, 01:19:54 PM »
This is why I love mustacians so much!  such thoughtful responses and such helpful information.  You guys are correct.  I went home and thought about this and while the fees with my previous idea were significantly less, the potential for growth suffered.

After considering the replies received, and in speaking to my dad who is a former CFP, I've come up with the following revised portfolio:

VANGUARD INFLATION PROTECTED SECURITIES FUND ADMIRAL : 5%
VANGUARD WELLINGTON FUND ADMIRAL CLASS : 20%
PUTNAM BOND INDEX FUND : 10%
EUROPACIFIC GROWTH FUND CLASS R-4 : 10%
HARBOR INTERNATIONAL FUND ADMINISTRATIVE CLASS : 5%
DODGE & COX STOCK FUND : 10%
NUVEEN WINSLOW LARGE CAP GROWTH FUND CLASS I : 10%
DFA U.S TARGETED VALUE FUND : 5%
GOLDMAN SACHS MID CAP VALUE FUND INSTITUTIONAL CLASS : 15%
MSIF SMALL COMPANY GROWTH PORTFOLIO CLASS P : 5%
TIMESSQUARE MID CAP GROWTH FUND PREMIER : 5%

According to my understanding, the above is now only 15% bonds, which is more in line with where I should be.

Additional thoughts?

I'm also going to do some additional research on the IRA option.  I had not considered this before. My match is only on the first 6%, so I wouldn't be losing out on anything by going that direction with the remaining 19%. The only thing is, my plan really doesn't have many fees tied to it.  I can change my investments every day if I wanted and there isn't a per trade fee of any kind.  I guess what has held me back from an IRA was that I though there would be more fees involved than I have under my company sponsored plan.

hoppy08520

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #4 on: October 09, 2012, 02:57:39 PM »
Looking at your prospective portfolio, by my calculation you have this much in bonds:

5% - VANGUARD INFLATION PROTECTED SECURITIES FUND ADMIRAL : 5%
6.7% VANGUARD WELLINGTON FUND ADMIRAL CLASS : 20% <-- this fund is 2/3 stocks + 1/3 bonds
10% PUTNAM BOND INDEX FUND : 10%
21.7% bonds total

Generally, I think you're making your portfolio unnecessarily complex. For example, if you have Wellington, you're making it harder to organize your overall portfolio because Wellington has stocks and bonds which overlap with the holdings of your other mutual funds.

For your bond allocation, I think the 2:1 ratio between Putnam Bond and Vanguard TIPS makes sense.

For your international allocation, I can understand your 2:1 ratio between EUROPACIFIC GROWTH FUND and HARBOR INTERNATIONAL FUND. Make sense.

But for US stocks, personally, I wouldn't invest in these three funds because of their high expense ratios:
1.37% ER - MSIF SMALL COMPANY GROWTH PORTFOLIO CLASS P : 5%
1.29% ER - TIMESSQUARE MID CAP GROWTH FUND PREMIER : 5%
0.99% ER - NUVEEN WINSLOW LARGE CAP GROWTH FUND CLASS I : 10%

For the same reason, this one is on the borderline:
0.76% ER - GOLDMAN SACHS MID CAP VALUE FUND INSTITUTIONAL CLASS : 15%

If you want to have a value tilt, then consider a mix of the following for your US stock allocation:

50% - S&P 500 Y <--- large cap blend
25% - DODGE & COX STOCK FUND  <--- (large/medium value)
10% - GOLDMAN SACHS MID CAP VALUE FUND INSTITUTIONAL CLASS
15% - DFA U.S TARGETED VALUE FUND : 15% <--- small value

There's nothing magic about this allocation for US stocks, except that you're overall approximately:
* 70% large cap
* 15% mid cap
* 15% small cap
And you'd have a value tilt. There are some advantages to having a value tilt, and I would avoid the growth funds because of their high expense ratios.

At any rate, at this point in your career some of these decisions are really about splitting hairs. The most important part is to keep contributing. When your balances are higher, than the finer points of asset allocation are more important. I'd just strive to keep expenses down (which is why I wouldn't steer away from those 3 expensive funds) and keep a balanced portfolio, and rebalance annually.

Back to the IRA, if you open an account at Vanguard and invest in the Total International Stock Market index (VGTSX), then you'd be paying just 0.22% ER instead of 0.85% - 0.89% for the international funds in your 401(k), and you'd have a more diversified fund. You won't pay trading fees or annual fees if you elect for electronic communications. You can change your fund selection within an IRA, although Vanguard does have some minimal restrictions on excessive trading as this drives up costs and is put in place to discourage market times and active traders. I would absolutely do this. Why pay a lot more in your 401(k) and have worse choices?

grantmeaname

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #5 on: October 09, 2012, 03:18:46 PM »
April, your new portfolio looks a lot better with regards to the asset classes, but it may be a bit too complex. You're definitely in the ballpark now, but I bet you could get by with only a couple of funds. For example, if you wanted to be at 80%/20% stocks/bonds, you could hold half of your portfolio in Vanguard Wellington (60/40 s/b) and the other half in one or two stock funds that are 100% stocks. Like I said, though, this iteration is way closer to where you want to be. Kudos!

If I may throw in one more tip:
The general rule of thumb is to contribute up to the maximum employer match in your 401k, then contribute up to the maximum ($5000) in your Roth or traditional 401k, then go and fill up your 401k with the remainder of your retirement savings. So that's my next advice at this point: if you don't have an IRA, I'd scale back your 401k contributions to max an IRA out (or, for double badass points, trim $5000 of spending instead and leave your 401k withholding untouched).

If I were you, I'd figure out which asset category in your 401k plan is worst, then hold that class in your IRA, which you can start at a reputable custodian like Vanguard or Fidelity. (For example, if your highest-fee asset class is bonds, and you wanted $5000 in bonds total, you'd hold $5000 in bonds in good-quality low-fee funds as 100% of your IRA, and hold no bonds in your 401k. Or if you wanted $7000 in bonds total, you'd only have to hold $2000 of the crappy fund in your 401k and you could hold $5000 in the low-fee alternative available in your IRA. Hopefully that's pretty clear.)

April

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #6 on: October 10, 2012, 03:01:57 PM »
April, your new portfolio looks a lot better with regards to the asset classes, but it may be a bit too complex. You're definitely in the ballpark now, but I bet you could get by with only a couple of funds. For example, if you wanted to be at 80%/20% stocks/bonds, you could hold half of your portfolio in Vanguard Wellington (60/40 s/b) and the other half in one or two stock funds that are 100% stocks. Like I said, though, this iteration is way closer to where you want to be. Kudos!

Thank you!  The reason I chose so many funds was the eggs in the basket theory.

If I may throw in one more tip:
The general rule of thumb is to contribute up to the maximum employer match in your 401k, then contribute up to the maximum ($5000) in your Roth or traditional 401k, then go and fill up your 401k with the remainder of your retirement savings. So that's my next advice at this point: if you don't have an IRA, I'd scale back your 401k contributions to max an IRA out (or, for double badass points, trim $5000 of spending instead and leave your 401k withholding untouched).
I wouldn't have a problem contributing an additional $5k.  The reason I'm contributing just 25% into my 401k is that my employer sponsored plan caps at 25%.  So if I understand correctly, I can max out my 401k with $17k AND put $5k into an IRA?

If I were you, I'd figure out which asset category in your 401k plan is worst, then hold that class in your IRA, which you can start at a reputable custodian like Vanguard or Fidelity. (For example, if your highest-fee asset class is bonds, and you wanted $5000 in bonds total, you'd hold $5000 in bonds in good-quality low-fee funds as 100% of your IRA, and hold no bonds in your 401k. Or if you wanted $7000 in bonds total, you'd only have to hold $2000 of the crappy fund in your 401k and you could hold $5000 in the low-fee alternative available in your IRA. Hopefully that's pretty clear.)

I agree with hoppy08520 that International Funds might be a good sector to keep in an IRA. perhaps I'll let the ERs at the time I setup the IRA make the decision :)

As for the following Three, my father, who was a CFP until he retired personally recommended these.  He stated they were worth the extra cost, and since I feel he is more of an expert than I am, I went with his recommendation.

1.37% ER - MSIF SMALL COMPANY GROWTH PORTFOLIO CLASS P : 5%
1.29% ER - TIMESSQUARE MID CAP GROWTH FUND PREMIER : 5%
0.99% ER - NUVEEN WINSLOW LARGE CAP GROWTH FUND CLASS I : 10%


grantmeaname

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Re: Just got 401K mailer exposing fees-would love input on changes
« Reply #7 on: October 11, 2012, 05:29:09 AM »
I wouldn't have a problem contributing an additional $5k.  The reason I'm contributing just 25% into my 401k is that my employer sponsored plan caps at 25%.  So if I understand correctly, I can max out my 401k with $17k AND put $5k into an IRA?
Exactly. And if you do, you're saving $22k/year of tax liability, some today and some when you're retired. That's seriously badass.

Quote
I agree with hoppy08520 that International Funds might be a good sector to keep in an IRA. perhaps I'll let the ERs at the time I setup the IRA make the decision :)
That's a pretty solid method. The only other thing besides expense ratios that I would look at is if your 401k custodian just totally doesn't offer one of the asset categories you need. If you wanted to be 5% in real estate, for example, you'd need to do that through your IRA custodian.

You're looking much better off now!