Target Date fund vs individual funds in 401(k)

[Bonez]

I just recently started my first job where I can contribute to a 401(k) and plan to contribute the max $18k over the last several paychecks for 2017. I have the option of several target date funds, but the expense ratio is 0.5% for their 2050 target date fund compared to ~0.04% for some of the available Vanguard funds. I realize that my savings rate is the most important factor at this point in my "investing career" but if I plan on saving at the same rate regardless of what funds I'm putting the money in right now I figured I might as well try and minimize expenses and mirror - as closely as possible - my current 2050 target date fund in my Roth IRA with Vanguard (54.1% total stock market index fund investor shares, 35.9% total international stock index fund investor shares, 7% total bond market II index fund investor shares, 3% total international bond index fund investor shares). This way early on I'll get used to re-balancing my portfolio, etc. Is it worth it to do the latter or is the difference between 0.5% and 0.04% expense ratios so insignificant with the little amount $$ invested that its not even worth the effort?

NAME/TYPE OF OPTION TOTAL ANNUAL OPERATING EXPENSE REDEMPTION FEES As a % Per $1,000 % # Days Additional Information
Stable Value
Stable Value Option 0.65% $ 6.50 N/A N/A
Income
Metropolitan West Total Return Bond Fund (Class I) 0.44% $ 4.40 N/A N/A
Vanguard GNMA Fund (Admiral Shares) 0.11% $ 1.10 N/A N/A
Vanguard Total Bond Market Index Fund (Admiral Shares) 0.05% $ 0.50 N/A N/A
Target Date
LifeCycle 2010 0.36% $ 3.60 N/A N/A
LifeCycle 2015 0.36% $ 3.60 N/A N/A
LifeCycle 2020 0.38% $ 3.80 N/A N/A
LifeCycle 2025 0.43% $ 4.30 N/A N/A
LifeCycle 2030 0.46% $ 4.60 N/A N/A
LifeCycle 2035 0.50% $ 5.00 N/A N/A
LifeCycle 2040 0.50% $ 5.00 N/A N/A
LifeCycle 2050 0.50% $ 5.00 N/A N/A
LifeCycle Income 0.36% $ 3.60 N/A N/A
Growth & Income
Columbia Dividend Opportunity Fund (Class Y) 0.62% $ 6.20 N/A N/A
Vanguard Institutional Index Fund (Institutional Shares) 0.04% $ 0.40 N/A N/A
Vanguard REIT Index Fund (Admiral Shares) 0.12% $ 1.20 N/A N/A
Growth
ClearBridge Large Cap Growth Fund (Class I) 0.85% $ 8.50 N/A N/A
JPMorgan Mid Cap Value Fund (Class L) 0.95% $ 9.50 N/A N/A
Janus Henderson Enterprise Fund (Class I) 0.78% $ 7.80 N/A N/A
MFS Technology Fund (Class R3) 1.27% $ 12.70 N/A N/A
Touchstone Small Cap Growth Fund (Institutional Class) 1.25% $ 12.50 N/A N/A
Vanguard S&P Mid-Cap 400 Index Fund (Institutional Shares) 0.08% $ 0.80 N/A N/A
Vanguard Small-Cap Index Fund (Admiral Shares) 0.06% $ 0.60 N/A N/A
Victory Integrity Small-Cap Value Fund (Class R6) 1.00% $ 10.00 N/A N/A
International
American Funds - EuroPacific Growth Fund (Class R6) 0.50% $ 5.00 N/A N/A
Vanguard Total International Stock Index Fund (Admiral Shares) 0.11% $ 1.10 N/A N/A

[Donnie]

I would go with the lower cost individual Vanguard funds. Rebalancing is overrated if you have an aggressive stock allocation anyway. No need to do it more than once or twice per year unless maybe there is a crash. I don't see Vanguard Total Stock Market or anything similar, which is the US equity fund you would want in addition to Total International and Total Bond.  I guess you could combine Institutional, Mid Cap and Small Cap, but it is probably easier to go with Institutional alone.

[ajm184]

The answer really depends on how active you want to be in your finances.  The expense ratio difference between the target date and the Vanguard Institutional  index fund is negligible.  Target date funds are unique between fund companies (Vanguard, Fidelity, etc.).  In considering a target date fund is the level of comfort you have with current asset allocation and how it would be expected to change in the future.  If you are comfortable with fund companies target date fund philosophy , this is a great approach because the only thing you need to do is throw money at it and basically forget about it until you retire.  Most folks have their own investing idiosyncrasies that compel a different allocation relative to a target date fund (I'm more aggressive in my asset allocation versus the 'rules of thumb' for my age/risk tolerance).

Rebalancing is not something that should be done that often, with annually being shown to be most effective, though quarterly is far more common.

[jhwkr542]

Most 401k websites I've used allow you to set up annual rebalancing. I would set up an allocation you like for the foreseeable future, set your contributions accordingly, and then set up annual rebalancing to that allocation. Set and forget. I'd do the bogleheads 4 fund portfolio, but you'd have to split the us equities portion of your portfolio between the vanguard institutional, mid cap, and small cap funds.

[Bonez]

I decided to try and replicate the Vanguard's target date 2040 Fund as close as I can with the available options. What do ya'll think?

 

37% Vanguard Institutional Index Fund - Institutional Shares (ER 0.04)

35% Vanguard Total International Stock Index Fund - Admiral Shares (ER 0.11)

13% Vanguard Total Bond Market Index Fund - Admiral Shares (ER 0.05)

10% Vanguard S&P Mid-Cap 400 Index Fund - Institutional Shares (ER 0.08)

5% Vanguard Small Cap Index Fund - Admiral Shares (ER 0.06)

 

[G]

I would totally do my own investments, no question at all. Sure, since your account is small, the fee is smaller; but if you can do it yourself, don't leave money behind.  Your first year would be, what, $80?  That adds up, particularly if it is doubling every 10 years....  That's worth it to me!

As you suggest, mirror that Vanguard 2050.  Keep it easy, use a combination of the Vanguard Institutional Index fund, International, and Bond (54/36/10 respectively).  As for rebalancing, the most recent data that I have seen suggest that it might actually be best to do it infrequently (the thought is that you lose out on the inertia).  I personally like to tinker and I rebalance every fall.

Good luck, you're gonna do great.

[hightower]

Looks good to me, although I personally wouldn't use so much international.  I know Vanguard does that in their target date, but it's a personal choice.  I would also consider using some of the Vanguard REIT if I were you (maybe 10%).  I'd get rid of the 5% small and get rid of at least 5% of the international and use 10% REIT instead.  But, it really doesn't matter as long as your savings rate is high and you stick to your plan, avoid selling when the market tanks, etc, etc.

[Bonez]

Thanks for the replies everybody

[djohnflatfeecfp]

Definitely build your own!  I am not a big fan of target-date funds for two main reasons.

The first is the higher cost you mentioned.  When these funds were launched years ago you might have been able to justify a slightly higher expense but as technology and resources available have improved the costs should have come down more.

Next is my personal experience with them back in the great recession.  I was new to the industry and the low man on a team who handled lots of corporate retirement plans.  Most plans we handled had these funds in them, but not all funds were the same for each plan. What we quickly learned by all the phone calls from participants in the various plans was not all target-date funds were created the same.  Some TDF's that were 2005 or 2010 were more aggressive than other TDF's that were the same time range. While one 2010 TDF would go to mostly conservative bonds the other would be much more aggressive because their assumption was you were going to live another 30 years, while the TDF holder might be assuming it was going to all cash in 2010.

So, I prefer the route where you build out your own portfolio where you know exactly what you are holding and its expenses.  If you are still wanting the convenience of a target-date fund and willing to pay the higher expense just be sure to truly understand its glide path as to when it gets more conservative and what it holds when it makes this shift.

 

[jhwkr542]

That allocation you have it broken down to certainly looks reasonable. It's more international than what I hold but what do I know? International has been killing it this year after several meh years.