Market timing and taking RMDs

[samclem]

Three comments:
1) Aside from the expenses of the individual funds (which are about double what she'd pay at Vanguard, Fidelity Spartan, etc for index funds), is there a way to get insight into the other fees she may be paying in this 401K?

2) Getting the funds out: Has she got the ability to do an in-service transfer of these 401K funds to her IRA? That could save her some significant fees >and< give her more control/investment choices. There are some negatives (decreased legal protections in some cases/states, sometimes less ability to take withdrawals penalty-free at age 55, etc) but overall, most people choose to roll their money into an IRA vs keeping it an employer's 401K, and that's a good choice.

3) Reading this . . . .

She's terribly busy with patients & paperwork & it's hard for her to make calls during the business day. It has literally taken 2 months for her to liquidate her variable annuity at Ameriprise & transfer the funds to Vanguard. . . . She has no investment education or interest in investing & wants me to manage all her accounts.

makes me think she's an ideal client for a set-and-forget-no-need-to-rebalance-this-or-even-think-about-it low-cost balanced fund. If the fees are about the same for Principal's 2035 TGT Date fund, and if the allocation is close to appropriate, why not just use that single fund? Nobody is going to want to mess around with tweaking her allocations, nobody is going to do a better job of it than the robots who automatically rebalance it, there are no tax loss harvesting considerations in this 401K. Who knows what >additional< tweaks the advisor at that 401K may try to slip in over the years (higher cost funds, etc),and that wolf's job is made much easier if her daughter has to individually defend every part a 7 fund asset allocation (Goldenmom won't always be there). This is a case where KISS is really important--not just easy, but likely more profitable. This needs to be on autopilot for many reasons.

 

[Goldenmom]

Cheryl is 48, and has about 20 years until retirement. We'd like to have advice about a reasonable AA for her Principal Group 401(k). Thanks!

 

[Goldenmom]

target2019, I'm studying your "after" chart. Is the 5% mid cap you have listed the MidCap S&P 400 Index? She has 2 mid-cap funds in her current holdings neither of which is listed as an index fund. Does that 16K go into MidCap S&P 400 Index? I need to really simplify this for her as she has limited time for phone calls between patients and is lucky if she gets lunch. Thanks!

 

[samclem]

Cheryl is 48, and has about 20 years until retirement. We'd like to have advice about a reasonable AA for her Principal Group 401(k). Thanks!

I've got almost no info on what she's got available. The PDFs you sent show what she owns, I can't open the footnotes to it. I don't have access to info on other fees she is paying, and the cost of ALL options under the plan.

Likely best option: If she can get the money out and into an IRA somewhere with reasonable cost funds, that would be an option worth exploring right off the bat.

Second best option: If she's got a single target-date fund or other balanced stock/bond fund available with fees that aren't totally crazy, that would be an OK option.

Third option: After you've examined and rejected the above two options: If you have to make up your own allocation of funds within her 401k, use low-cost index funds to build it. And keep it very simple, plan to rebalance it just once per year. Does she have NO bond index funds available to her in this 401K? The allocation Target2019 offered in his spreadsheet looks as good as any, but look for a cheap bond index option. As far as mechanics. why not make this simple and have her sell all of her present holdings and put the money into a money market fund, stable value fund, etc AFTER MAKING SURE THERE'S NO LOAD. After it's all been dumped in there, she can then parse it out as needed according to the allocations you recommend. Yes, it is two steps, but that's it for a year.

 

[Goldenmom]

pb4uski,
I will inquire about the 401(k) match, and the amount being saved towards retirement and report back. Thanks for these excellent questions.

What is a good AA for a 48 yr. old? Ours is 50/50 and we are 66 and 70, but we still have some earned income and are still contributing to a solo 401(k).

Should hers be 70/30, 80/20, or even more aggressive? She has the Principal Group 401(k), a Vanguard Target Date 2035 fund valued at about 67K, will have no pension, and has no Roth. I am encouraging her to make efficient use of her HSA but she hasn't done that yet. Thanks!

Goldenmom

 

[Goldenmom]

pb4uski,
Could the deductible IRA be moved to Vanguard if she qualifies for it? I'm much more familiar with Vanguard funds and their fees are lower.

 

[target2019]

target2019, I'm studying your "after" chart. Is the 5% mid cap you have listed the MidCap S&P 400 Index? She has 2 mid-cap funds in her current holdings neither of which is listed as an index fund. Does that 16K go into MidCap S&P 400 Index? I need to really simplify this for her as she has limited time for phone calls between patients and is lucky if she gets lunch. Thanks!

Exactly, GM.
In the list, S&P 500, S&P 400, S&P 600. They all have e/r .31%.

But, you need to change how future contributions will go in. If you do not do this, and wait for the change to be effective, you will end up with more confusion as new contributions go where you do not wish.

1. Help daughter decide AA, first. She currently has 35% in bond fund and stable value. 35% is a good choice. 65% in equities sounds reasonable. But she must make decision. Of course you can help with that.
2. Future contributions into 5 funds - bond, 500, 400, 600, int'l: 20%, 20%, 20%, 20%, 20%. I like simplicity. Later, you can adjust the percentages for new contributions. This is simple to do in the Principal web site I use. Probably same for hers.
3. Once you know the new contributions are going into the five funds, she can go in and make changes. For example she can move 100% of the Stable Value fund into the Core Plus Bond fund.
4. I would go slow, and make sure it is right. That is just me, make smaller moves so I don't confuse myself. Next, move the Growth I into S&P500.
5. Continue with simple moves. I just logged in, and to be honest, in this area it is confusing, and I was straining to understand all of their 'helpful' tools.
6. Find out how many transfers she is limited to, and for what period.

Also, find out if she can do a deductible traditional IRA in addition to 401K.

Look at Roth IRA with Vanguard also.

To answer question from another poster about Target fund: they are all .90% E/R. If you decide to use that, you will give up more than .50% yearly. Sounds small but over 20 year period it is quite a bit. But it is a solution that some would take.

BTW, there are additional fees, and I think they are about 7 bps.

 

[Goldenmom]

samclem, I'm going to find out about the in-service transfer of at least some of her funds to her Vanguard IRA. (I've read that PG has a reputation for very poor customer service so this may be a long-term project.) She has $16,593 in the PG Lifetime 2030 fund now. They also offer a 2040 Lifetime if that is a better choice for her. They don't list a 2035 Lifetime like the one she has at Vanguard. She is very vulnerable to being taken advantage of since she doesn't want to learn about her investments. Do you recommend that she fold ALL of her sub-acccounts into the 2030 Lifetime account? I appreciate all of the options and ideas this group is providing.

 

[samclem]

pb4uski,
Could the deductible IRA be moved to Vanguard if she qualifies for it? I'm much more familiar with Vanguard funds and there fees are lower.

If her 401K plan allows for in-service transfers, she can set up a "traditional IRA" (tIRA) at Vanguard and transfer the funds from her 401K to that account. She doesn't need aby special qualifications to set up an IRA at Vanguard. Anything she rolls over from her 401K will remain tax-deferred, just like her 401K is. There are some differences in the legal protections offered to IRAs compared to 401Ks (in the case of bankruptcy, etc) and these vary by state. But it's often a good idea to transfer funds out of an employer's 401K and into an IRA as soon as possible.

In addition to this, she can also make future contributions to a tIRA from her earnings at work. Depending on her income, these may or may not be tax deductible (it phases out at higher income levels). Making deductions that are NOT tax deductible can lead to a bookkeeping headache that lasts for years, and I would personally not do it.

 

[Goldenmom]

samclem,
Fee for Principal Group 2030 is 0.88%. Where should her new contributions go?

 

[samclem]

samclem,
Fee for Principal Group 2030 is 0.88%. Where should her new contributions go?

That's a high ER, but honestly I feared it would be worse. What is the match from her employer? While we are doing this: What is her Modified Adjusted Gross Income (MAGI), her tax filing status, and how much does she normally contribute to her 401K every year? Any tIRA contributions?

 

[Goldenmom]

samclem,
I tried to attach a pdf of what's available in her plan. I will try to post that again. I see no bond index fund. Do you think the 2030 Lifetime fund at 0.88 is totally crazy expensive? Would that be a reasonable bucket to fold everything in plus new contributions while we are figuring out if we can rollover some of her account to her Vanguard IRA. What do y'all think about the bonds and international funds and that Principal Financial stock? Why does she even own that PFG stock at all?

 

[target2019]

I've got almost no info on what she's got available. The PDFs you sent show what she owns, I can't open the footnotes to it. I don't have access to info on other fees she is paying, and the cost of ALL options under the plan.

Likely best option: If she can get the money out and into an IRA somewhere with reasonable cost funds, that would be an option worth exploring right off the bat.

Second best option: If she's got a single target-date fund or other balanced stock/bond fund available with fees that aren't totally crazy, that would be an OK option.

Third option: After you've examined and rejected the above two options: If you have to make up your own allocation of funds within her 401k, use low-cost index funds to build it. And keep it very simple, plan to rebalance it just once per year. Does she have NO bond index funds available to her in this 401K? The allocation Target2019 offered in his spreadsheet looks as good as any, but look for a cheap bond index option. As far as mechanics. why not make this simple and have her sell all of her present holdings and put the money into a money market fund, stable value fund, etc AFTER MAKING SURE THERE'S NO LOAD. After it's all been dumped in there, she can then parse it out as needed according to the allocations you recommend. Yes, it is two steps, but that's it for a year.

samclem,
All good discussion.
1) Target funds are .90 e/r. Also there is an additional admin fee of 7 bps, I believe.
2) Can not transfer out while still employed.
3) One bond index called Core Plus Bond. It is .70% e/r. She might have others available, as I see in my plan, but maybe not.
4) The pdf likely has ALL options available to her.
5) The footnotes, etc. add up to 3.5 pages of 6 pt type for my plan. She might have access to the complete plan document, but I do not see this in my account. I have a printout that employer gave me for our plan.
6) Most of the funds have a 30 day restriction of 1 transfer allowed. This is documented on web site.

 

[samclem]

This is why 401Ks have a bad reputation. And this plan is far from the worst.

Target 2019,
Thanks for the info. It's great (and lucky) you have the inside scoop on the Principle 401Ks

1) Target funds are .90 e/r. Also there is an additional admin fee of 7 bps, I believe.

Uggh. Well, that's "only" half a percent more (per year) than the index funds she's got available. Plus, any bond funds she'd need (maybe 30-40% of her AA at this age?) look to be about .70% ER, so that's even closer to the ER of these TGT date funds. I'm on the fence--in this case, maybe the KISS factor combined with the crappiness of the other options makes this the best choice for her. It's a set-and-forget solution, and if it helps prevent future bad decisions/predation by a "helpful" advisor, then it could be money well spent.

Are we sure there's no load? When I looked this fund up online (the Target 2050 version), it showed a 5% load, but I'm hoping that is "to the public" and waived within this 401K.

2) Can not transfer out while still employed.

Is there any chance things are different in the plan offered to GM's daughter, or would they be uniform?

samclem,
Do you think the 2030 Lifetime fund at 0.88 is totally crazy expensive? Would that be a reasonable bucket to fold everything in plus new contributions while we are figuring out if we can rollover some of her account to her Vanguard IRA.

The 2030 fund is expensive, but possibly worth it as noted above due to the crummy alternatives and the need for a solution that doesn't need any attention. But we need to be sure there's no load before jumping in to it.

Why does she even own that PFG stock at all?

Who knows? But she certainly doesn't need it. If there are no strings, sell it.

 

[pb4uski]

pb4uski,
I will inquire about the 401(k) match, and the amount being saved towards retirement and report back. Thanks for these excellent questions.

What is a good AA for a 48 yr. old? Ours is 50/50 and we are 66 and 70, but we still have some earned income and are still contributing to a solo 401(k).

Should hers be 70/30, 80/20, or even more aggressive? She has the Principal Group 401(k), a Vanguard Target Date 2035 fund valued at about 67K, will have no pension, and has no Roth. I am encouraging her to make efficient use of her HSA but she hasn't done that yet. Thanks!

Goldenmom

If she is 48 today and aspires to retire at 60, then she'll retire ~ 2028. The Vanguard 2030 target retirement fund has a 75/25 AA so that isn't a bad place to start and then put contributions into the bond fund so the account will become less equity focused between now and ~2030 when she retires.

The market is ~65% large cap, 27% mid-cap and 8% small cap, so I would go with the following: 35% large cap index fund, 15% mid cap index fund, 5% small cap index fund, 20% international and 25% core bond fund (assuming she has not taxable or tax-free retirement savings to consider) and put new money in the bond fund but monitor the AA and make midcourse adjustments as needed.

pb4uski,
Could the deductible IRA be moved to Vanguard if she qualifies for it? I'm much more familiar with Vanguard funds and their fees are lower.

Yes, if she qualifies for a deductible IRA then I would do it at Vanguard.

Also, there has been mention of an in-service rollover.... if this is available it would be a good idea but plans allowing in-service rollovers are rare.

 

[samclem]

Uggh. Well, [the Target 2030 ER is] "only" half a percent more (per year) than the index funds she's got available. Plus, any bond funds she'd need (maybe 30-40% of her AA at this age?) look to be about .70% ER, so that's even closer to the ER of these TGT date funds. I'm on the fence--in this case, maybe the KISS factor combined with the crappiness of the other options makes this the best choice for her. It's a set-and-forget solution, and if it helps prevent future bad decisions/predation by a "helpful" advisor, then it could be money well spent.

Okay, I'm off the fence. If you think your daughter will not succumb to temptation and purchase other funds at the advice of an advisor and if she isn't allowed to do an in-service transfer from this 401K to an IRA, then I think she should set up a low-cost mini-portfolio within this 401K. She'll save about 0.60% per year compared to the Principal Group's 2030 Target Fund, which is $600 per $100K invested. That's a lot of beer and pizza.
But--if you or she will be tempted to time the market or look for "bargains" or hot deals among the other choices, or if you aren't going to rebalance the funds across the AAs every year or so, then just put it into the Target 2030 fund, and don't think about it again. Only you and she know the situation and your level of commitment, knowledge, and discipline you are able give to this project.
And, if you set up several funds, I agree with the AA's recommended by pb4uski and Target2016. I like the idea of going relatively low on the bond fund now (maybe 25%) and directing her new contributions to that fund. This helps reduce the "hit" from the high ERs in that bond fund, and it will help to gradually increase her bond holdings over the years.

On the day she terminates employment for whatever reason, she should strongly consider moving all of this money to a Vanguard IRA, unless she's got some unusual circumstances.

 

[target2019]

PFG = Principal Financial Group. Hard to say why she has that. It may have been a settlement of some kind?

If the choice is between one fund at close to 100 bps, and 5 funds at 50 bps less, I would take the later choice for 20 years to come. I think you give up 8% approximately if you go with the higher fee in this case. But that is just my opinion. She might forget to re-balance, and it costs more. Or maybe it works in her favor.

 

[Goldenmom]

That's a high ER, but honestly I feared it would be worse. What is the match from her employer? While we are doing this: What is her Modified Adjusted Gross Income (MAGI), her tax filing status, and how much does she normally contribute to her 401K every year? Any tIRA contributions?

Hi samclem,
We got her Vanguard agent authorization completed & mailed. She's going to call Principal next week about forms needed to make me her agent at Principal and to find out if any of her funds can be rolled over to her Vanguard IRA.

Her annual pay is listed on the Principal website as $72,726 and it says she contributes $419.57 every 2 weeks which is 15%. I urged her today to max this out by further reducing lifestyle to get to 17%. She's divorced and files as individual.

I'm leaning towards simplifying & consolidating into the index funds since they're cheaper & will get you the available bonds & international funds in her plan.

I will have to greatly simplify a consolidation plan for her or she will get overwhelmed on the call(s). I wonder if it would be easier for her if I organized it by what she will sell, hold, buy, and then give her the final percentages.

She told me today that her old Ameriprise "advisor" was able to "move around" several things in a single call so we may not be too restricted on what we can change at one time. Taking dinner break and will be back soon.

 

[Goldenmom]

samclem and members,

The only Fixed Income options in Cheryl's PFG plan are:

• Principal Global Investors: Core Plus Bond 0.71%
• Principal Estate Inv: U.S. Property 1.15%

Her only International options are:

• Principal Global Investors: Diversified International 1.06%
• Principal Global Investors: International Emerging Markets 1.51%
• Principal Global Investors/DFA: International SmallCap 1.46%

None of the above funds say "Index" in their names.

 

[Goldenmom]

samclem,
No tIRA contributions. Sorry I missed that question earlier.

 

[Goldenmom]

Target2019,
I don't see where Core Bond Plus is an index, but she has almost no Fixed Income choices. The funds marked N/A on the pdf are available under plan but not currently held. I was disappointed, but not surprised, to see you say that she cannot transfer out while employed--not any of her funds while employed? She's considering new employment at a hospital. That would allow me to rollover her current 401(k) and get away from these limited expensive funds. With any luck the hospital would have a better plan.

 

[Goldenmom]

pb4uski,
Thanks for the detailed breakdown of the funds and their percentages. That should be very helpful if we go with discrete funds as opposed to the Lifetime2030 option. I'm considering both very carefully.

 

[samclem]

Goldenmom,
So, she gets no employer match for her 401K.

The money that goes into her 401K goes directly from her employer into those accounts, she never sees it or gets an easy chance to spend it. You know her best, and this is important: If, instead, some or all of her retirement savings money was automatically sent from her bank to a Vanguard account once a month, would she leave that arrangement alone for 20 years, or is it likely that she'd get into a pinch sometime and turn it off to use the funds for spending? The answer to this question will be important to determining whether she should keep contributing >all< her retirement savings to the 401K, or if she'd be better off diverting some/all to a Vanguard tIRA instead.

Also, for 2016, the phaseout for IRA deductibility for a single taxpayer starts at a MAGI of $61K, so that might limit her to a 401K (for new deductions--she could still roll over all of her existing 401K into a lower-cost tIRA at Vanguard if she changes jobs).

 

[Goldenmom]

samclem,
I'm very interested in your "off-the-fence" mini-portfolio to save for greater stores of beer and pizza. I'll personally re-balance each year right here with the help of the forum, and there will be NO TINKERING. (Be assured that January 2016 was a good teacher and threw a "bear" scare into me that I won't soon forget).

I like the 25% bond fund allotment with new contributions going to Core Plus Bond. Upon her retirement she will be instructed to rollover her 401(k) into her Vanguard IRA. She might do this sooner if she changes jobs. I will create a folder with instructions in the event of my death or infirmity.

I'm reading this thread straight down and responding as I go. Sure hope I see her completed portfolio below like one of Christine Benz' Morningstar portfolio makeovers. Christine lists the "before" and then the "after" portfolio with commentary. I love portfolio makeovers and all the comments that follow from readers.

 

[target2019]

Target2019,
I don't see where Core Bond Plus is an index, but she has almost no Fixed Income choices. The funds marked N/A on the pdf are available under plan but not currently held. I was disappointed, but not surprised, to see you say that she cannot transfer out while employed--not any of her funds while employed? She's considering new employment at a hospital. That would allow me to rollover her current 401(k) and get away from these limited expensive funds. With any luck the hospital would have a better plan.

This looks fine to me. Sometimes you need to play the hand that's dealt:

https://www.principalglobal.com/documentdownload/27017

If that was available to me, I might invest into it.

I do understand the menu choices, as I have a full color menu provided by my employer. There are differences, though, such as that bond fund.

If a fund does not say index, it is not necessarily a warning, and that you should avoid. Reading a bit more, and looking at the goals of the fund is suggested.

She may or may not move to another job. It's probably worthwhile to complete this plan on paper, at least. It very well could be that the next job has worse choices. The understanding you gain now will help from this point forward.

For example, as said by someone, most plans do not allow you to transfer out while still an employee.

I was calculating the weighted expense ratio for before and after. Before is .70, after would be .55. That might be a surprise, but when you look at the bond fund and international fund, about half of the total is in more expensive funds. When you noodle about in a spreadsheet and look at these things, it might suggest other moves, especially if you stay put in a job for 20 more years.