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Question about fixed income allocation
05-18-2008, 12:42 PM
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#1
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Confused about dryer sheets
Join Date: Apr 2008
Posts: 8
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Question about fixed income allocation
I am a new investor and participating in my companies 401K plan.
I am pretty happy with the equity choices I have, but my 401K does not seem to offer good options for my fixed income allocation. This troubles me as I wanted to place all of my tax inefficient bond money in my 401K.
Here are the three choices I have:
1. PIMCO Total Return - 0.9% expense ratio, no-load
2. Goldman Sachs Government Income A (GSGOX) - 1 % expense ratio, no load
3. Merill Lynch Institutional Fund (money market fund) - 0.22 % expense ratio, no load
Which would be best?
I contribute the max to my 401k and have a 70/30 split stocks:bonds.
For now, I am opting for the GSGOX, a intermediate term bond fund. But the cost of the two bond funds just seem obscene to me, and I am considering just putting my fixed income allowance into the MMA.
Thanks for any tips
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05-18-2008, 01:01 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
Location: west coast, hi there!
Posts: 8,809
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Is there a balanced fund in your 401k? If so, perhaps some allocation to this will get you exposure to fixed income at a better ER.
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05-18-2008, 01:28 PM
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#3
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Confused about dryer sheets
Join Date: Apr 2008
Posts: 8
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There are not a lot of index funds in my 401K. There is a s&p 500 index fund, and the rest are actively managed. There is a couple income and growth funds, which are actively managed with ER just as high. There is a global fund with a slightly lower expense ratio, that fluctuates in how much it puts into bonds (ie market times
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05-18-2008, 01:37 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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Doc, I'd either put my FI in another account where you can access vehicles with lower expenses or hold my nose and go with the Pimco fund. I am stuck with a high fee 401k and just suck it up and deal with it, putting it all into a well-run balanced fund.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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05-18-2008, 01:47 PM
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#5
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Moderator Emeritus
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
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No expert here, but my understanding is that with fixed holdings in particular, the expense ratio is very important. Unless you are aware of strong differences in performance among the three I'd go with PIMCO, too. And you're right, you definitely want to keep your bond allocation in qualified accounts if possible.
Another thought: if I recall you are fairly young. I'd consider not tying up my 401k with fixed right now - maybe stick with their stock or balanced funds and worry about allocating your appropriate fixed allocation at a later date. If you really want bonds now and have some after-tax money, just buy some municipal bonds until your 401k frees up some day.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.
As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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05-18-2008, 01:52 PM
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#6
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Confused about dryer sheets
Join Date: Apr 2008
Posts: 8
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Thanks
Thank you for the replies.
I am investing in taxable accounts as well (20% of gross total).
Maybe municipal bonds are an option, I was trying to make this as hands off as possible for now.
Just out of curiousity, why the universal approval for the PIMCO fund? Because of the lower ER?
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05-18-2008, 01:56 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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Another way to look at it:
If you are 70/30 in this account and your equity index charges .3%, your total expense for the account using the Pimco fund would be .21% (equity) plus .27% (bond), or .58% on the entire account. Obviously this is above what you could do with, say, Vanguard, but its not terrible. I willingly pay north of .5% on certain vehicles even though I am generally a total cheapskate, and many suckers investors pay well north of 1%.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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05-18-2008, 02:03 PM
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#8
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Moderator Emeritus
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
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Quote:
Originally Posted by rheumdoc1977
Just out of curiousity, why the universal approval for the PIMCO fund? Because of the lower ER?
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Yes.
Vanguard and others have cheap muni bond funds if you feel you need to invest after-tax money in bonds. Click here for an example.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.
As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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05-18-2008, 02:18 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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I recommended Pimco because of their track record.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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05-18-2008, 03:16 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
Location: west coast, hi there!
Posts: 8,809
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Quote:
Originally Posted by rheumdoc1977
Just out of curiousity, why the universal approval for the PIMCO fund? Because of the lower ER?
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This fund is run by Bill Gross who has an excellent reputation in the FI field. You might check out his monthly commentary here PIMCO - Investment Outlook - May 2008 "All Quiet on the Western Front"
I'm amazed that you have to pay such a high ER. HABDX is basically the same thing run by Gross with ER=0.52. You might want to suggest some changes to whoever sets up the 401k offerings -- but I wouldn't hold my breadth on influencing the decision.
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05-18-2008, 07:31 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Aug 2007
Posts: 1,224
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Quote:
Originally Posted by rheumdoc1977
There are not a lot of index funds in my 401K. There is a s&p 500 index fund, and the rest are actively managed. There is a couple income and growth funds, which are actively managed with ER just as high. There is a global fund with a slightly lower expense ratio, that fluctuates in how much it puts into bonds (ie market times
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In addition to the advice above I'd add using your IRA (and spouse's if available) and also consider an HSA as tax deferred space for fixed income.
DD
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05-18-2008, 09:50 PM
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#12
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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Quote:
Originally Posted by lsbcal
This fund is run by Bill Gross who has an excellent reputation in the FI field. You might check out his monthly commentary here PIMCO - Investment Outlook - May 2008 "All Quiet on the Western Front"
I'm amazed that you have to pay such a high ER. HABDX is basically the same thing run by Gross with ER=0.52. You might want to suggest some changes to whoever sets up the 401k offerings -- but I wouldn't hold my breadth on influencing the decision.
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I wouldn't be surprised if the craven pickpockets professionals setting up these plans substitute higher-fee funds into the 401ks because they know you're getting a tax break on them and have limited choices.
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05-19-2008, 02:29 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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DW is in PTTRX. It is the only bond option. But her fee is not .9... It is about half that.
Most of the funds in my 401k are heavy expenses and a mediocre track record. Thank goodness there are some indexes. I use the indexes (and the fees are high about .6)...
When I FIRE, I will probably roll over the money from my 401k to an IRA.
I am looking into DW 401k. Since she ER at 50, she does not get to withdraw from the 401k without a penalty (expect for 72t). I am considering rolling it into an IRA... (lower fees and more options)
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05-19-2008, 03:16 AM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2005
Posts: 6,192
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i own the same fidelity funds in my 401k and my ira. equity income, high income bond fund and diversified international. the fidelity funds on average in the 401k have about a .25% or so more expenses on them ...
on days where the change is small the ira will be up and the 401k funds down..
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05-19-2008, 07:14 AM
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#15
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Full time employment: Posting here.
Join Date: Oct 2003
Posts: 961
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Quote:
Originally Posted by ESRBob
I wouldn't be surprised if the craven pickpockets professionals setting up these plans substitute higher-fee funds into the 401ks because they know you're getting a tax break on them and have limited choices.
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My guess is that the employer [whether aware of it or not] is just passing the fees of the plan on to the employees. Why else would a plan with millions of dollars in assets pay any 12b-1 fee when there is a cheaper version of the fund out there?
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05-20-2008, 09:24 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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I don't know if there are legalities on this, but is it possible that the companies themselves (the sponsor) is getting some of the fee kicked back to them? Your point was that the higher fee may be to cover expenses of the plan, but what are those: the costs of the HR people running them? That is rightly a corporate expense, but it may be easy to tag that onto the employees' retirement plan and receive a check from the fund manager each year from those higher fees. (Again, this may be illegal, but I'd be interested to know if anyone out there is expert)
Or it could all be going to the fund manager for 'additional services'. By the time the HR folks get finished with the fund managers' contract and protracted negotiations, and all the other services they bundle together, they may be substituting higher-fee funds (or layering on an additional set of fees) and the HR people just throw up their hands and say, what are we going to do, go through all this again with another firm? So the additional fees stay ostensibly to cover some special unique service twists the fund manager offers for employees. But I'm skeptical -- I suspect it is just that they know there is a high switching cost, and they make it easy for HR to just say "sure" and sign on the dotted line.
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05-20-2008, 09:39 PM
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#17
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Thinks s/he gets paid by the post
Join Date: Jan 2008
Posts: 2,020
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We used to have a Pimco bond fund in our 401(k)... sorry, I really wish I could remember the expenses. They were very low for us, but then they're run by a sister company so that probably had something to do with it (although, the other side of me wonders why that didn't prompt them to charge us more!)... They dropped Pimco in favor of an internal fund.
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05-21-2008, 02:02 PM
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#18
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Full time employment: Posting here.
Join Date: Oct 2003
Posts: 961
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Quote:
Originally Posted by ESRBob
I don't know if there are legalities on this, but is it possible that the companies themselves (the sponsor) is getting some of the fee kicked back to them? Your point was that the higher fee may be to cover expenses of the plan, but what are those: the costs of the HR people running them? That is rightly a corporate expense, but it may be easy to tag that onto the employees' retirement plan and receive a check from the fund manager each year from those higher fees. (Again, this may be illegal, but I'd be interested to know if anyone out there is expert)
Or it could all be going to the fund manager for 'additional services'. By the time the HR folks get finished with the fund managers' contract and protracted negotiations, and all the other services they bundle together, they may be substituting higher-fee funds (or layering on an additional set of fees) and the HR people just throw up their hands and say, what are we going to do, go through all this again with another firm? So the additional fees stay ostensibly to cover some special unique service twists the fund manager offers for employees. But I'm skeptical -- I suspect it is just that they know there is a high switching cost, and they make it easy for HR to just say "sure" and sign on the dotted line.
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My guess is that the 401(k) provider is taking the 12b-1 fees and/or revenue sharing fees from the Mutual funds and using them to pay for part of its administration fees. It's probably the same thing as why brokerages [like at Schwab and Vanguard] may not charge transaction fees for classes of funds that have 12b-1 fees. Gee I wonder who gets those 12b-1 fees? Fund marketing costs my eye. The 12b-1 fees are just used to pay brokers trailing asset under management fees. Perhasp Finance Dude can enlighten us on the intricacies of who gets the 12b-1 fees.
btw - did you ever meet an HR person that understood anything about mutual funds, investing, etc?
- Alec
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05-22-2008, 07:22 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 2,487
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I agree with Rich...if you are young, stick with mostly equities. If you feel you need fixed income, I would check out the munis for your state, where they will most likely be tax free. If you are in a state with no income tax, they will probably be fed, state, and AMT free as well (check with your tax advisor), regardless of the state of origin. A 5% yield muni, in most cases is equivalent to about an 8.25-8.5% yield on a taxable corporate bond.
R
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05-22-2008, 08:53 AM
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#20
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Thinks s/he gets paid by the post
Join Date: Apr 2008
Posts: 2,024
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Quote:
Originally Posted by Rambler
If you feel you need fixed income, I would check out the munis for your state, where they will most likely be tax free. If you are in a state with no income tax, they will probably be fed, state, and AMT free as well (check with your tax advisor), regardless of the state of origin. A 5% yield muni, in most cases is equivalent to about an 8.25-8.5% yield on a taxable corporate bond.
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This is what I am looking at for our taxable funds, but I'm also 49, 6 years from ER, and live in CA. We're also trying to avoid the AMT, which is why we're considering CA munis or a CA bond fund (VCAIX).
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