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Implications of changing 401K allocation
Old 11-08-2008, 08:30 PM   #1
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Implications of changing 401K allocation

I have Merrill Lynch for my 401K at work and I have noticed that one my choices has a terrible expense ratio, 2.19%, and even if the ratio was lower the fund does not excite me compared to other choices.

If I sell off this fund (which is down big-time obviously) and move to money to the S&P Index fund or another better choice, for tax reasons (or any other reasons), is it a good time to sell this fund off while it's low?

I know you don't pay taxes until you need the 401K, but still I am assuming the account keeps track of all your transactions and maybe this move might be smart down the road .... or is it a bad time to sell off since the my money in the fund is lower than a year ago? I hope I am being coherent!

I am still trying to grasp all of the concepts of tax harvesting, etc.
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Old 11-08-2008, 08:47 PM   #2
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No tax harvesting on 401K money and no tax implication for changing your 401K allocation... It doesn't matter what you buy or sell in your 401K, it doesn't matter whether your investments are making or losing money. All money going in is untaxed, all money coming out is taxable as ordinary income. Period. So there is really no reason to sell an investment at a loss in a 401K if you are still happy with that investment. If you are not happy with it however, then feel free to sell it and buy something else. Is it a good time to do the exchange now? Well it depends on what you are selling and what you are buying...
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Old 11-08-2008, 08:55 PM   #3
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Thanks for the explanation, very helpful.

Well, I am looking to sell a mid cap growth fund with a bad expense ratio. Federated Kaufmann AKAUAX.

I am looking to pour more money into the S&P 500 index fund they have (0.18% expense ratio) and maybe a small bit into an international value fund (0.81% expense ratio).

I just hate to sell with this fund being so low ... I want to unload it and move onto something better ... but I have no problem sticking with it until the market jumps if that's smart.

I guess I have to weight keeping it vs. putting more into a fund which is low too but might offer better long-term gains (index fund and/or international value).

Perhaps do not sell off the expensive fund, but simply change the allocation of my 401K so I stop putting money into it...

Any suggestions?
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Old 11-08-2008, 09:37 PM   #4
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Personally I do not like expensive funds and 2.2% is VERY expensive. But according to Morningstar KAUAX has ranked in the top 20% of all funds in the mid cap growth category for the past 1-, 3- and 5-year period despite the high fees. This year of course the high fees have contributed to its underperformance relative to other mid cap growth funds, but that alone may not be compelling enough to bail out of this fund right now IMO. However, high fees makes it harder to this fund to keep outperforming its peers over the long term, so it may be wise to look at cheaper alternatives.

As for switching from a mid cap growth fund to an S&P 500 fund or international fund right now, it is probably OK because all three fund categories have been hammered almost equally in the past year. Just make sure you don't throw your asset allocation out when you do the exchange.
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