Help with 401K options

[hightower]

I'm not crazy about my wife's 401k plan.  Its all actively managed funds through Fidelity (check out the fees on that small cap value fund!).  There's no option to move to a self directed account and no cheap vanguard funds available (which they used to offer but for some reason got rid of last year).

Anyway, I need help deciding where to put her money.  I was thinking of just using the large, mid, and small cap options and maybe adding the total bond fund too, but now I'm starting to wonder if it would just be better to put it all in the target retirement fund for simplicity sake?  I'll still be able to get my desired asset allocation in my 401k, our Roths, and the taxable account I'm starting this year.

What do you guys think?  Here are their options:

Name	Asset Class	Exp Ratio
COL LARGE CAP IDX A (NEIAX)	Large Cap	0.45%
DELAWARE VALUE INST (DDVIX)	Large Cap	0.72%
FID BLUE CHIP GR (FBGRX)	Large Cap	0.82%
FID CONTRAFUND (FCNTX)	Large Cap	0.71%
FID FIDELITY FUND (FFIDX)	Large Cap	0.52%
COL MID CAP IDX A (NTIAX)	Mid-Cap	0.64%
COL SM CAP IDX A (NMSAX)	Small Cap	0.45%
FID SM CAP DISCOVERY (FSCRX)	Small Cap	1.01%
FID SMALL CAP GROWTH (FCPGX)	Small Cap	1.13%
FID SMALL CAP VALUE (FCPVX)	Small Cap	1.22%
FID INTL CAP APPREC (FIVFX)	International	1.14%
FID REAL ESTATE INVS (FRESX)	Real Estate	0.78%
BLKRK LP IDX 2020 A (LIQAX)		0.50%
BLKRK LP IDX 2025 A (LILAX)		0.49%
BLKRK LP IDX 2030 A (LINAX)		0.49%
BLKRK LP IDX 2035 A (LIJAX)		0.50%
BLKRK LP IDX 2040 A (LIKAX)		0.51%
BLKRK LP IDX 2045 A (LIHAX)		0.53%
BLKRK LP IDX 2050 A (LIPAX)		0.52%
BLKRK LP IDX 2055 A (LIVAX)		0.61%
BLKRK LP IDX RTMT A (LIRAX)		0.51%
PRU TOT RETURN BD Z (PDBZX)		0.55%
FMMT RETIRE GOV II (FRTXX)		0.42%

[Lithium]

Assuming you have enough flexibility in your other accounts and save enough to maintain your allocation, I think the large and small cap funds at 0.45% are your best options.  I would lean more towards the large cap fund because the small cap fund has more of a growth tilt, while the large cap is pretty evenly blended between value and growth stocks.

Avoid the bond fund.  Since bond funds have lower returns to begin with, higher expenses have a more negative impact on performance.

[jfoxcpacfp]

An even division among:

• LC Growth


• LC Value


• SC Growth


• SC Value


• Int'l


• REIT

I realize fees matter, but in the big scheme of things, a properly diversified portfolio with regular rebalancing and with emotions completely out of the equation matters more. Once you choose your allocation, then choose the funds with the lowest fees. Do not let the fees push you into doing something silly, like going 100% TDF or lolling around in a bond fund.

 

[hightower]

What's the advantage to growth and value funds over the cheaper "regular" large, mid, small cap?  I like the idea of just going ahead and diversifying within the choices she has.  I think the REIT, small, mid, and large funds are okay on fees.  But, the sc growth and value funds are 2x as much, so why go with those?

[Lithium]

The standard advice for dealing with crappy 401k plans is to consider it as just one part of your overall portfolio, pick the least crappy options in it, and meld the rest around it to your overall desired allocation.  Most physicians with high savings rates should not pick more than one or two options in a lousy plan.

The international fund looks pretty awful by the way.  Besides the exorbitant expense ratio, it is extremely growth tilted.

[jfoxcpacfp]

hightower wrote:

What’s the advantage to growth and value funds over the cheaper “regular” large, mid, small cap?  I like the idea of just going ahead and diversifying within the choices she has.  I think the REIT, small, mid, and large funds are okay on fees.  But, the sc growth and value funds are 2x as much, so why go with those?

Click to expand...

Because we focus on optimal long-term growth, taking all factors into consideration. The expense ratio of a fund is one factor but not the factor. Diversification and behavior management are both more important to us than expense ratios. Once we have set the diversified portfolio, then we turn to finding the funds with the lowest expense ratios, not the other way around. That's not to say our method is perfect, but it works quite well for us and for our clients.

For a much better articulated explanation of what we do and why, read Simple Wealth, Inevitable Wealth. Not the outdated version on Amazon, but the 2013 version on Nick's website.

 

[DMFA]

Expense ratios are not the be-all, end-all. Obviously they're important, but if they're beating the index, you can spare the expense. Then again, the managers have to beat the index...

[Zaphod]

I would put it into the two lowest ER funds, or only the large cap which will mimic the indices. There is no need to diversify every single account to be reflective of your overall AA. Choose an AA, then work within the limits of your total accounts to achieve the desired mix that best fits each one. Why pay 1+% for a SC growth fund here if you can get it for 0.15% in your other account. Doesnt make any sense.

Also, see if there is a brokerage option. There might be and not many people are aware of it. You can then choose whatever you want.

[WallStreetPhysician]

I just wrote a post on my blog (http://www.wallstreetphysician.com/three-fund-vs-target-date-fund-portfolios/) about choosing the three-fund portfolio versus target-date funds.  I actually argue that most people should save the 8 basis points by using the three-fund portfolio instead of a target-date fund.

In your case however, I would just go with the target-date fund.  The difference between the individual mutual funds and target-date funds is only 4-8 basis points, and you are not getting a diversified portfolio with the individual funds like you would with a three-fund portfolio.  Just treat this 401k as a separate retirement account that is fully diversified with a target-date fund, and use your other accounts to build a similar diversified portfolio with a much lower cost.

[hightower]

Thank you all for your input.  After mulling it all over, I think I'll just stick with a 50/50 mix of the two cheapest funds for now and hold out hope that we'll be able to convince her employer to change their options in the near future.

In terms of asset allocation, I'll just consider her entire 401k a sort of S&P 500 fund and invest accordingly in my 401k and our Roth's to get the diversity I'm looking for.  Her 401k only makes up about 18% of our total fortunately.

I agree with Zaphod that there's no reason to pay 1+% for a SC growth when I can buy vanguard's for a tiny fraction of that in my other accounts.  I'll just have to live with the fact that my AA won't be 100% exactly what I want it to be right now.  It will be a little lopsided towards large cap and small cap until we can get better options for her.  At least we won't be getting totally killed with high fees (I can live with 0.45% considering they are good performing funds).

Thanks again!  This forum is so helpful

[DMFA]

WallStreetPhysician wrote:

I just wrote a post on my blog (http://www.wallstreetphysician.com/three-fund-vs-target-date-fund-portfolios/) about choosing the three-fund portfolio versus target-date funds.  I actually argue that most people should save the 8 basis points by using the three-fund portfolio instead of a target-date fund.

In your case however, I would just go with the target-date fund.  The difference between the individual mutual funds and target-date funds is only 4-8 basis points, and you are not getting a diversified portfolio with the individual funds like you would with a three-fund portfolio.  Just treat this 401k as a separate retirement account that is fully diversified with a target-date fund, and use your other accounts to build a similar diversified portfolio with a much lower cost.

Click to expand...

This is actually a very good point in this instance, not least because the TDFs have some of the lower ERs and probably mirror the standard index funds more.  The slightly shifting asset allocation within TDFs should not be particularly difficult to overcome; just check the fund's composition when you rebalance, and count that as part of your overall portfolio.

You may want a TDF which does not actually mirror what you want your overall asset allocation to be.  For instance:

• Say you want 20% bonds in your overall portfolio (solely for the sake of example)...


• If you have a significant of Roth or taxable space, you may want the entirety of your bond allocation to be in the tax-deferred 401k (since domestic equities are better in Roth given the higher return or taxable given lower turnover/dividends)


• Say the 401k comprises 50% of your overall portfolio...


• ...then you would choose the TDF which has 40% bonds (in this instance the 2025 TDF LILAX) and hold no bonds elsewhere.

To further the example:

• That fund is 39% US stock [73/20/7 large/med/small] and 22% int'l stock (of which 5% is emerging)


• That adds only 1.4% small cap (0.39 * 7% * 0.5 of whole portfolio) and 11% int'l (0.5% EM) as part of your whole portfolio...


• ...hence, you would probably want to make up the difference on your other accounts with small cap funds (even if all you want to do is mirror VTI/VTSAX etc) and int'l funds, and consider adding emerging funds [though added complexity]

Just another way to illustrate that [in my opinion obv] the most important thing is the asset allocation across all your retirement holdings, and next is choosing the "least bad" option within accounts that don't have good options.