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Learning, Sharing, and Teaching => Investor Alley => Topic started by: VaCPA on April 06, 2016, 02:38:18 PM

Title: Splitting 401k allocation 50/50 between target date and index fund?
Post by: VaCPA on April 06, 2016, 02:38:18 PM
I was tinkering with my wife's 401k plan which looks really good actually(much better than mine). The fees are very reasonable. There's some index funds with very low fees, including one called Vanguard Employee Benefit Index(S&P 500) with .02% ER. The Vanguard target date funds have very low ERs too, all at .06%. My first inclination is just put her 100% in a target date fund and not give it any more thought, easy peasy. But that Employee Benefit Index has such a great ER I was thinking of going 50/50. I don't really want to go 100% in the index fund because despite the great ER I'd have no diversification. We're 37 & 35 so in accumulation phase so I don't mind an aggressive allocation. Thoughts?
Title: Re: Splitting 401k allocation 50/50 between target date and index fund?
Post by: PhysicianOnFIRE on April 06, 2016, 02:46:54 PM
Sounds like You Need an IPS. (http://www.physicianonfire.com/you-need-an-investor-policy-statement/) There's an active thread (http://forum.mrmoneymustache.com/investor-alley/what-is-your-sweet-n-short-ips-(investment-policy-statement)/?topicseen) on the subject right here on the MMM forums today!

That being said, those are great expense ratios.  The risk / return profile of 100% stock versus a target date fund are very different.  The difference between a 0.06 and 0.02 expense ratios are clinically insignificant, even if one is triple the other.

My advice would be to decide on a risk tolerance, come up with an asset allocation based on you and your wife's collective risk tolerance, and apply it across all accounts.  Then, you can answer the question you posed.

The IPS can wait, but coming up with a desired asset allocation is the first step.
Title: Re: Splitting 401k allocation 50/50 between target date and index fund?
Post by: seattlecyclone on April 06, 2016, 03:35:13 PM
Yes, pick an asset allocation first. Once you have that figured out, then look at how to get to that asset allocation in the cheapest way possible given the funds available to you.

One thing you can do to squeeze the last penny of expenses out of your 401(k) is to consider putting part of your money in a target retirement fund for a very close year to satisfy your bond allocation, and then invest in the lower-fee stock fund to fill out the rest of your stock allocation. You might be a bit short on international if you do this, but it all depends on what your desired asset allocation is.
Title: Re: Splitting 401k allocation 50/50 between target date and index fund?
Post by: forummm on April 06, 2016, 04:50:08 PM
The 0.04% is nothing to worry too much about at this point. It's $40/year on a $100k balance. If you want to be more in target date, then go with that. The peace of mind is probably worth whatever it costs.
Title: Re: Splitting 401k allocation 50/50 between target date and index fund?
Post by: GrOW on April 06, 2016, 04:58:40 PM
Very solid options from a fees perspective. Definitely compare target fund options to you risk profile. You may find that the one that fits you/her has nothing to do with the target year of the target fund.
Title: Re: Splitting 401k allocation 50/50 between target date and index fund?
Post by: VaCPA on April 07, 2016, 07:30:26 AM
Thanks, good advice all around. I'll think about how I want to allocate based on our risk/return preferences and then revisit the fund options.