Author Topic: question on 401k allocations  (Read 746 times)

light switch

  • 5 O'Clock Shadow
  • *
  • Posts: 10
question on 401k allocations
« on: October 27, 2018, 08:02:24 AM »
I've been reviewing my options for allocation in my 401k, and have run into some inconsistencies with regard to reporting that I wanted to ask about here.  I set the fund up several years ago, and haven't really paid attention to it.  I'm set up in a Principal Target date fund that has returned about 9.9% over a ten year time frame.  But what I've noticed is that the expense of this fund is 3 dollars per 1000 invested.  To say it another way, the investment expense is .30%.  This is just how it's laid out, so if it looks like I don't get it, it's possible I don't.  Anyhow, because of what I've been learning recently, I was looking to minimize the expense.  I found they had an option to change my allocation to a Principal S&P 500 Index "separate account".  Now investment expense, as I can read on Principal's website, is 50 cents per 1000 invested, or .05%.   The performance over ten years was shown as something like 11 percent.  It seems like I'd be better served by the S&P fund, working with the numbers shown, right? 

Well to make the long story a little longer, I checked both funds out from outside the Principal website.  The S&P index fund shows two fees: a .46 percent expense ratio and a .15 percent management expense.  While the target date fund shows only a .30 percent expense ratio, and no management expense.  These numbers come from U.S. News website.

So after all that, I'm thoroughly confused about whether or not there is value in moving my allocations to the index "separate account".  I don't want to pay MORE expenses than what they already had me set up for.  So what's the deal?  I'm hoping there are some clues in what I've written that stand out as obvious mistakes in my evaluation of the two funds.  As you can see, it's a fairly basic evaluation.  Cost, and ten year performance of all the options offered by the plan. 

 

MDM

  • Walrus Stache
  • *******
  • Posts: 9611
Re: question on 401k allocations
« Reply #1 on: October 27, 2018, 10:12:03 AM »
Costs charged for a fund within a 401k are not always the same as the cost for the same fund outside a 401k.  The within-401k charge can be higher (e.g., the 401k administrator adds an overhead charge) or lower (e.g., a front-end load may be waived).

Comparing any S&P500 fund with any non-S&P500 fund is apples vs. oranges.  In particular, a target date fund likely has a bond component, along with international and mid and small-cap US stocks.  See Callan periodic table of investment returns - Bogleheads for one example of why "past performance is no guarantee of future results."

light switch

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: question on 401k allocations
« Reply #2 on: October 27, 2018, 11:55:30 AM »
Thank you for your response.  I didn't realize that fees could be different for a fund, depending on whether or not it's held inside a 401k.  So I find that the website I used for analysis was quoting the fund costs outside of a 401k. 
 
I unfortunately don't understand your thoughts on comparing these things.  As it stands, I'm in a position to compare them, and have a financial responsibility to my future self to do so. So since I HAVE to compare them, I thought this would be the right place to ask if I'm doing it right.  Could you go into a little more detail about that statement?

I understand that I can't depend on past performance, and I understand that there's no sure thing.  I will try to find some time to study the bogleheads information you linked.  At face value, I can't understand how it applies to my question.  So thank you for that as well. Be patient with me.  I'm very new to the idea that I may not have to work until I die of old age.

MDM

  • Walrus Stache
  • *******
  • Posts: 9611
Re: question on 401k allocations
« Reply #3 on: October 27, 2018, 01:50:06 PM »
I unfortunately don't understand your thoughts on comparing these things.  As it stands, I'm in a position to compare them, and have a financial responsibility to my future self to do so. So since I HAVE to compare them, I thought this would be the right place to ask if I'm doing it right.  Could you go into a little more detail about that statement?
The price of an apple will differ from the price of an orange.

The price of a target date fund, that itself holds investments in multiple funds, will differ from the price of a single S&P500 fund.  The performance of each fund will also differ - we just don't know what that difference will be.

Quote
I understand that I can't depend on past performance, and I understand that there's no sure thing.  I will try to find some time to study the bogleheads information you linked.  At face value, I can't understand how it applies to my question.  So thank you for that as well. Be patient with me.  I'm very new to the idea that I may not have to work until I die of old age.
See
the 'Basic Terms' tab of the personal finance toolbox spreadsheet,
Getting started - Bogleheads
Investment Order
Stock Series
www.etf.com/docs/IfYouCan.pdf
for reading material.

It may take a few hours to go through that material once, and perhaps longer to understand all of it.  But you will likely know much more after reading it than you do now.  And everyone who knows these concepts now, once upon a time did not.

Take the time to do the reading, then come back with more questions - good luck!