Switch American Funds to Vanguard? Worht it? Add IRA?

[PNW_FIRE]

Hi, my husband and I are brand new to investing and doing so pretty late in the game (I'm late 30s and he's mid 40s). We would love some advice on the following:

My husband would like to invest about $6K into his 401K and another $6K into a Roth IRA each year.

His 401K is though Mass Mutual and he is currently enrolled in American Funds 2040 Target Date Retirement (total fees and charges is supposedly 1.20%). He also has some Vanguard options available in his 401K plan that he could switch to, including Vanguard 500 Index Fund Admiral Shares (total fees and charges are .84%) and Vanguard Total Bond Market Index Fund Admiral Shares (total fees and charges are .85%).

Does it make sense to switch his 401K American Funds 2040 TDR to one of the Vanguard options offered?

We were thinking of switching his 401K enrollment to the Vanguard 500 Index Fund Admiral Shares for the lower fees, and opening a Vanguard Roth IRA Target Retirement 2040 Fund (which has a 0.14% fee) . Does this seem like the right thing to do? Is this enough diversification (all 401K would be in stocks; the IRA would be ~83%/16% stocks and bonds)? Should we consider something completely different?

On my end, around 10% of my salary goes to my work pension, and I am thinking of enrolling in my work's 457B (which would be probably another 10% of my salary to a Vanguard Target Retirement 2060 Fund). I have the option of a Regular or Roth 457B--any insights on which I should choose?


Thanks for any and all help!

[Radagast]

Here is a comparison of the funds mentioned. Although the American Funds 2040 has very high expenses, it is very comparable to the Vanguard 2040 fund, and so not an immediate catastrophe. It has not done as well as the S&P500, but what has. With fees like that I would both move the entire thing into the lower cost Vanguard funds, and also petition to get better 401k plan. https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan

Certainly start the IRA and fill it as a priority after any company match. Ditto for the 457B, depending on what it available in it. With the 401k all in stocks, you might do better with The Three Fund Portfolio, ie. US stocks, international stocks, and bonds held in dedicated funds in your various accounts to get your desired asset allocation. https://www.bogleheads.org/wiki/Three-fund_portfolio

[PNW_FIRE]

Thanks for the feedback, Radagast!

I like the idea of switching his 401K selection to the "lower cost" Vanguard Total Bond Market Index Fund Admiral Shares (.84% ER instead of the 1.2% ER he currently has with his Target Date Retirement selection), HOWEVER...I'm a little confused on how we would balance and diversify this 401K selection with his IRA allocations.

If he wants his portfolio to be 65% stocks & 35% bonds, and is planning on investing approx. $6K to his 401K and $6K to his IRA/year, what IRA allocations could he select to get him that stock/bond mix? And ideally he'd like 60% of the stocks to be U.S. and 40% to be international. I keep playing around with the percentages, but can't get close to the desired 65/35 stock/bond mix if we select VFIAX for his 401K allocation.

For example...
401K: 50% ($6K) in VFIAX (all U.S. stock)
IRA: 35% ($4,200) in VBTLX (all U.S. bond) and 15% ($1,800) in WHAT? I don't see a Vanguard U.S. or International stock option for less than $3K

Am I thinking about this incorrectly? This complexity makes me think maybe we should just eat the higher fees and keep the Target Date Retirement in the 401K and pick a Vanguard TDR for the IRA?

I am sure we're not understanding this clearly---anyone, please help!!!

[Telecaster]

You could buy the equivalent Vanguard ETF.  The minimum investment for ETFs is the price of one share.   

[PNW_FIRE]

Thanks, Telecaster. Yes, we could do:

401K: 50% ($6K) in VFIAX (all U.S. stock)
IRA: 35% ($4,200) in VBTLX (all U.S. bond) and 15% ($1,800) in VXUS/Vanguard Total International Stock ETF (all international stock)

This gives the right stock/bond mix (65%/35%) but not the right U.S./International stock mix (want 60/40, but we'd be getting 85/15). Is there a different way to play around with the allocations to get us what we want? Are we over thinking this, or just not thinking about it correctly?

[Radagast]

Are we over thinking this...?

Probably ;)  Presumably, the amount of money you have is very small relative to what it will be in the future, so minor differences in allocation are not a very big deal right now (I know they seem like big deals though, they did to me too when I first started and had all of like $5k.)

With the funds you mentioned, you can do 50% S&P500 in the 401k; and 25% bonds, 25% international in the IRA. 25% is a nice percentage for bonds and at this point is just as good or even better than 35%.

You have VBTLX (total bond) in the 401k as well, so you can can fine tune your bond allocation there if you want like 401K: 35% ($4,200) in VBTLX, 15% ($1,800) VFIAX | IRA: 25% ($3k) VTSAX, 25% VTIAX ($3k)

Either of those two is good. There are infinite possibilities, but once you have the stock/bond split decided they mostly don't foreseeably make a difference.