Author Topic: Switching funds around in 457 plan  (Read 5323 times)

tryingtogetby

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Switching funds around in 457 plan
« on: November 21, 2013, 04:46:23 AM »
I am 31 years old.  I work for my county government.  I currently have part of my paycheck going to a deferred compensation plan (457b) with Prudential.

When I initially started contributing, I just chose the goalmaker plan, that chooses investments based on risk level and expected retirement date.  Although there are Vanguard funds available through Prudential, goalmaker does not invest you in any of them. 

This is my current investment profile (roughly, they rebalance quarterly, so they are a tiny bit off of this, but not much):

7% - Stable Value - Prudential Stable Value Fund (is this essentially cash?)
8% - Fixed income - Core Plus Pimco Fund - .48% expense ratio
17% - Large Cap Value - Invesco - ACGMX - .59%
17% - Large Cap Growth - SA T Rowe Price Growth Stock Strategy - .73%
5% - Janus Mid Cap - JMCVX - .77%
5% - Morgan Stanley Mid Cap - MPEGX - .71%
5% - Allianz Small Cap - PSVIX - .86%
5% - Clear Bridge Small Cap - SBPYX - .90%
31% - International - American Funds EuroPacific GrowthFund R4 - REREX - .85%

The Vanguard Funds that are available are:
Fixed income - Vanguard Total Bond - VBTIX - .07%
Large Cap Blend - Vanguard Institutional Index - VINIX - .04%
Mid Cap Blend - Vanguard Mid Cap Index - VMCIX - .08%
Small Cap Blend - Vanguard Small Cap - VSCIX - .08%

I am trying to figure out if it is worth moving from the funds I am currently in to the roughly equivalent Vanguard funds.

First, it is my understanding that blends essentially have a combo of value with growth, correct?  So I could take the 34% currently in large cap growth and value and put it into Vanguard Large cap blend?

Second, it does appear that the 10 year averages for the funds I am currently in have average annual returns a bit higher than those of vanguard, even when the expenses are taken into account.  Obviously I know that past performance is not indicative of future performance, but it is hard to get past that, to a point.  Any thoughts?

Third, if I were to switch, are there any consequences to essentially selling what I have and buying the vanguard stuff instead?  Since it is deferred comp, there should not be any tax obligations right now, but are there likely to be any fees associated with making this switch that would make it a less desirable option?  Should I instead just try to put future contributions into vanguard and leave what is currently invested alone?

Fourth, right now I have invested with a moderate risk profile.  The aggressive plan would cut the bonds and stable value.  Is that crazy to do?

Anything else I should be considering?

I am very new to this, but in terms of investing itself and in terms of my knowledge, but I want to make the best decisions now to help me out the best 30 years from now.  I do not have much money invested at all right now, but over time, that will change.

Thank you so much.

maxdriver

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Switching funds around in 457 plan
« Reply #1 on: November 22, 2013, 04:40:28 AM »
The Vanguard funds you are considering are frankly where you want to be. Index funds have the lowest fees, especially through Vanguard. You are right to question whether it makes sense to switch if your overall return may be greater with higher fee investments. Historically speaking, the majority of funds do not beat the overall market and if they do it is typically for periods of 10 years or less. Retirement investing is a marathon, not a sprint and the odds are you will be better off by matching the market returns through index funds, than by investing in funds that make their own stock and bond investments.

The Vanguard index funds you have available cover the entire US stock and bond market (growth and value).

There are no tax implications when you transfer funds within a retirement account. They do not keep records on dividends and capital gains. When you take a distribution in retirement (or an early withdrawal after separation from employment) the $$ is taxed as ordinary income.

Do you know if you are paying any additional fees on top of the individual fund expense ratios? It is not unusual (actually it is the norm) to be paying administrative fees ranging from .50% to 1.00%+ with a 457 plan. These fees do not show on your quarterly statement and may be mentioned in the fine print of the marketing materials. If you are not sure I would contact your HR department and inquire.


Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Switching funds around in 457 plan
« Reply #2 on: November 22, 2013, 04:40:03 PM »
My sympathies for being stuck with Prudential as your 457 (b) provider.  I had to hold my nose and use their offerings for over 10 years.  The apparent objective of Goalmaker in our plan was to "diversify" you across whatever the worst performing, highest cost funds in the program were, not to stitch together an investment portfolio comprised of the best funds in their plan universe.  Their excuse for using these dogs was that you did not have to pay the loads.

However, your funds seem to be a bit better than the garbage we were offered.  Assuming you do not pay the loads but pay fund expenses, I would consider keeping anything that outperformed the indices over an extended period of time.  Go to Fidelity and through the mutual fund research tool, take a look at the growth of $10,000 over 10 years.  A couple of your funds are surprising winners.  Those that barely track or underperform the index would be candidates for replacement.

I simply do not agree with the Vanguard cultists here.  I have some index funds, but I also have a number of actively managed funds that have outperformed the indexes, year in and year out.  One of the T Rowe Price Funds has been doing that since 1956.  My approach is to select the best of what's available, whether index or actively managed.

Our Prudential stable value fund is paying a hair under 3 percent this year.  That's a good place for uninvested cash and a great place right now to leave at least a year's worth of expenses when you RE.  If you hit a rough patch before age 59 1/2, it's a great reserve fund.  When I left almost 7 years ago, I rolled over most of the account, but left a chunk of cash there.  It's still there because of the yield.

It sounds like you have an asset allocation based on risk tolerance in mind, but that should apply to your entire portfolio, not just your 457 plan. As a local government employee, you probably have a pension, your 457 plan, plus the opportunity to invest in IRA's.  You may also have Social Security.  In my view, pensions substitute for a lot of the fixed income investments folks entirely dependent on 401(k) plans need for stability.  Read what Nords has to say about valuing your pension on his military retirement site.

At 31, if you are investing heavily in the deferred comp program, you may walk away with a seven figure portfolio if you stick it out to standard retirement age.  I know a number of people that accomplished that.

maxdriver

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Switching funds around in 457 plan
« Reply #3 on: November 22, 2013, 07:49:12 PM »

I simply do not agree with the Vanguard cultists here.  I have some index funds, but I also have a number of actively managed funds that have outperformed the indexes, year in and year out.  One of the T Rowe Price Funds has been doing that since 1956.  My approach is to select the best of what's available, whether index or actively managed.


No Vanguard cultist here, merely a realist.

What percentage of actively managed funds have exceeded the indexes over the past 30 years? 

avonlea

  • Guest
Re: Switching funds around in 457 plan
« Reply #4 on: November 23, 2013, 10:28:15 AM »
Another Reader and maxdriver,

I'm not the OP but I appreciate the info and advice that you both provided in this thread.  I like reading about different perspectives and different paths to financial success.  Thanks!

maxdriver

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Switching funds around in 457 plan
« Reply #5 on: November 23, 2013, 10:46:16 AM »
You are welcome...the OP must have lost interest:-)

tryingtogetby

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Switching funds around in 457 plan
« Reply #6 on: November 24, 2013, 11:13:44 AM »
Nope, haven't lost interest, only been a couple of since I got responses and it's the weekend.  Used Friday to get some more details on my 457 plan and came home to a family emergency which I have been dealing with since then.

I found out that my 457 plan has no fees beyond the gross expense ratio.  Nothing else.  My plan consultant said I could move things around with no fees, but seemed to imply I shouldn't because my portfolio has made 21% to date (except everything has done well this year).

I do have a pension plan right now, but it is either 7 or 10 years for vesting and it is unlikely I will be employed in the government for that long, so that will be gone. 

Early retirement is not necessarily my goal (high student loans plus an anti-mustachian spouse), but I am looking to do the best with what I have and make as many smart choices as possible to give myself the strongest financial future.

I do appreciate the advice and information!  Thank you.