Your Thoughts on DDs 401k Choices

[TromboneAl]

DD just started her new engineering job; she's 21. She asked for my thoughts concerning her 401k selections.

Here are her choices:

Principal Guaranteed Fund Contract- General -account backed, stable value contract w/ declared rate of 4.15%

High Yield Bond Allocation - Columbia High Yield Fund (CMHYX) and Neuberger Berman High Income Bond Fund (LBHBX). The portfolio may also invest in us government securities, mortgage-backed securities, such as certificates of deposit, treasury bills, and commercial paper.


Balanced Income Allocation - Vanguard Wellesley Income Fund (VWIAX)


Principal LargeCap S&P 500 Index Separate Account


Growth and Income Stock Allocation - 3 mutual funds: Brandywine Blue (BLUEX), Dodge & Cox (DODGX), and Vanguard Windsor II (VWNAX)


Small Cap Stock Allocation - Two mutual funds: Wasatch Small Cap Growth (WAAEX) and Munder Small Cap Value (MCVYX)


Science and Technology Stock Allocation - 3 mutual funds: Ivy Science and Technology I (ISTIX), Seligman Communications & Information (SLMCX), and Vanguard Health Care (VGHAX)


International Stock Allocation - 3 mutual funds: Artisan International (ARTIX), GE Institutional International Equity (GIEIX) and UMB Scout International (UMBWX)




Let me know what you think!


Also, it looks like Roth 401(k) is better, but more risky in case tax laws change...do you think I should do all Roth, or should I put some in a regular 401(k)?

What are your thoughts?

Thanks,

 

[Kronk]

100% S&P 500. At least for a couple of years. Not really concerned about diversification with a new account, and I wouldn't be thrilled with those choices.

I'm not sure I agree that a Roth 401k is the best choice. Looks like she'd be in the 25% bracket with a 60k income? I guess at that point you're just running a bet on whether your tax bracket will be higher or lower than that when you're in retirement. Even as a 21-year-old, I'd lean towards the tax deferral. Now, if some/all of the 401k contributions were at the 15% level, I'd probably opt for the Roth 401k.

 

[unclemick]

Yep - at age 21, 100% S&P 500.

Any company match?

heh heh heh - my Nephew lasted about ten yrs before he cracked and read Four Pillars and wife had their first child - so saving for a house down payment altered the 100% equity mindset.

 

[freebird5825]

Not qualifid to comment on regular 401(k) or Roth 401(k).

Age 21, just starting out, high salary growth potential, world by the......

85-90% S&P 500 with the remainder in one or more of the other 3 categories (small cap, S&T, or International) just for some fun and a little diversification out of the gate.
At a minimum, she might want to record what she thinks her AA plan should be (i.e. AA vs landmark ages) and file it somewhere for a revisit later on.

 

[travelover]

And don't forget to look at expense ratios, even if it is just for her eduction.

 

[Bestwifeever]

I vote the S&P too at her age. And I vote non-Roth--no reason.

 

[ziggy29]

Until she has enough in the account to make diversification worthwhile, just put it all into the S&P fund. I think down the road GIEIX might be a decent choice to include international exposure with a tolerable 0.55% expense ratio.

As far as diversification with small caps, WAAEX has been a good performer but its expense ratio is a bit on the high side.

As for Roth or conventional 401K, if she's in the 25% bracket or higher, I'd go conventional. In the 15% or lower, I'd go Roth.

 

[Texas Proud]

I vote she should go with a few mutual funds even though the others have a point with the low balance....

If you start her early on asset allocation and rebalance, then it will become part of what she does... if you stick her in one fund, who knows when she will look at it again...

As for regular vs ROTH... I would say it depends on tax bracket... if she is in the 25%, then enough to get to the bottom of it... if she is not, then ROTH...

 

[LOL!]

Even in a 401(k), I would not advocate 100% equities. However, the bond choices look like junk bond funds, so they don't really provide the diversification away from stocks like a good bond fund would.

Thus, I would lean to the S&P500 fund if the expense ratio was low enough for say 80% and 20% in the stable value fund. But that kinda neglects the important small cap and international equities for now.

Skip the Roth if she is in a higher tax bracket than 15%. If at 15%, it is probably a wash, but it's hard to say because some folks lose out on tax credits in that bracket, so a traditional is better even in the 15% bracket for them.

It's amusing that the "Growth and Income" option includes 2 value funds. A newbie looking at the choices could be easily thinking, "Yep, I want my 401(k) to grow and I want income from it as well, so give me Growth & Income!"

What are the expense ratios on all the options?

 

[ziggy29]

Even in a 401(k), I would not advocate 100% equities. However, the bond choices look like junk bond funds, so they don't really provide the diversification away from stocks like a good bond fund would.

They don't seem too good, no.

If I were to add bonds to this I'd probably do it through Wellesley, considering Wellesley to be about 2/3 bonds. So if I wanted an 80/20 allocation (which seems reasonable for a 20-something), 70% in pure stock funds and 30% in Wellesley would do it.

 

[LOL!]

I agree on the Wellesley advice.

 

[Animorph]

I'd like something along the lines of 20% S&P500, 20% dodgx, 20% waaex, 40% artix, just winging the percents without checking the balance at Morningstar. I use dodgx myself as well as other Artisan and Wasatch funds. I wouldn't want to forget foreign investment these days, so I wouldn't go all S&P500.

Your DD should be able to do a traditional 401k and a Roth IRA while she's still Roth IRA eligible. Get it in while you can, though Roth 401k may remain widely available in the future. Otherwise, you might want to split between Roth and traditional.

 

[Midpack]

I would be a lot more aggressive than all SP500 at age 21, but that's just me. What's her risk tolerance? I'd have a mix of small cap, foreign, large cap and no more than 20% Wellesley at her age - but I'd have to know expense ratios to give specific deployments. Not great choices, but I've certainly seen worse.

Wish her all the best in her new job from us. I started out as a Mech Engineer before Management pay lured me away...

 

[clifp]

I'd certainly consider the UMB scout fund for portion say 30%. Morningstar 5* over every time period, below average risks, and reasonable .96% ER . AFAIK, there isn't much data either way to show that index international funds outperform actively managed international funds.

I invested my grand nephew and nieces small educational IRAs in it, mostly cause they had modest minimums.

 

[target2019]

25% - Vanguard Wellesley Income Fund (VWIAX)
25% - Dodge & Cox (DODGX)
25% - Vanguard Health Care (VGHAX)
25% - GE Institutional International Equity (GIEIX)

02.55% Cash
45.58% U.S. Stocks
36.54% Foreign Stocks
14.79% Bonds
00.54% Other

 

[LOL!]

Sorry, I think I got confused. Can one pick ANY of the mutual funds listed? Or do they come as a package? That is is "Small Cap Stock Allocation" a 'fund of funds' or can one select a single fund out of those listed for small cap?

 

[TromboneAl]

I think you have to pick the groups, but I don't know.

 

[jazz4cash]

I looked at a friend's plan the other day. It was a plan offered through Prudential.
How on earth do they come up with such a mish-mash of funds from umpteen various fund companies? My friends offerings were similar except each one used the description "seperate account" like the S&P 500 fund in your daughter's plan which I believe means it is not technically a mutual fund, but more of a clone. My friend's ER's were 1.3-1.5 for all the funds except the S&P which was about .8%, but I believe there may be hidden expenses in the clone funds as the disclosure requirements are not well defined (my opinion). It's easy to compare clone funds performance to the "real" fund or index to see how it compares. I think she should stick to the S&P and the stable value actually looks decent. Look into rollover options too.

 

[Kronk]

Maybe I'm just spoiled by having several hundred thousand dollars in my portfolio, but it seems like slicing and dicing a portfolio under $20,000 seems like a needless complication. Especially when the choices are kind of middling. The choices I'd make for myself aren't the same choices I'd advise for her.

I just don't see the need to spend life energy allocating 20% here and 30% there and then keeping track of it (even just seeing it on quarterly reports) on an ongoing basis. If the market tanks again, having a bond allocation might keep her from losing, what, $100?

Give her a copy of Four Pillars as a gift, make her read it and reevaluate a year from now. How much she contributes is almost certainly going to be a lot more important than which of these she chooses. A year from now, she may have left the company or the 401k choices may have changed. Don't overthink it.

 

[LOL!]

I agree mostly with Kronk, but I also want to point that TIAA-CREF has shown that many folks set their 403(b) / 401(k) allocations when they are first employed and then never bother to ever change them. So I think it involves a more than cursory look, but it's true that whatever is done now won't make a big difference over the next couple of years.

 

[Animorph]

Slice and dice is EASY in a 401k! No fund minimum, no taxes and tax basis to track. That's the place to start, even with just a few bucks. No need to track it closely, especially if you can split contributions to all your funds.

It's not until you start up a taxable account that it gets painful. Then I would recommend simplicity for those that don't want to spend the time.

 

[ziggy29]

It's not until you start up a taxable account that it gets painful. Then I would recommend simplicity for those that don't want to spend the time.

Yep. All I have in my taxable investment account is one "total market index" fund and a little bit of Berkshire Hathaway B. All of my bonds are in the IRAs and my 401K for tax efficiency.

It's way too much of a tax hassle to deal with many funds and rebalancing in the taxable account for me, especially since I don't have all that much in taxable accounts.

 

[Kronk]

I agree mostly with Kronk, but I also want to point that TIAA-CREF has shown that many folks set their 403(b) / 401(k) allocations when they are first employed and then never bother to ever change them. So I think it involves a more than cursory look, but it's true that whatever is done now won't make a big difference over the next couple of years.

Hrm. Good point. This is T-Al's daughter, though, so she's more likely to be one of those people who actually do track it.

Slice and dice is EASY in a 401k! No fund minimum, no taxes and tax basis to track. That's the place to start, even with just a few bucks. No need to track it closely, especially if you can split contributions to all your funds.

It's not until you start up a taxable account that it gets painful. Then I would recommend simplicity for those that don't want to spend the time.

Well, true, it is easy. Just slap in some percentages and go. So maybe I'm on a personal simplicity kick and just projecting that onto this problem. I don't feel strongly enough about it to continue with much of an argument, though. She's buyng (has bought?) a car, moving (has moved?), starting her first job out of school. With all that going on, go for the simplest solution until the amount matters, then figure out if she's saving anything after-tax and construct portfolio allocations at that point.

 

[target2019]

Teaching/showing a kid the benefit of asset allocation is a great thing. You should see what my kid picked. It was awful, but understandable. The advice he received from his mega-employer was pretty shallow. He picked funds appropriate for a retiree, not a 26-year old.

It didn't take much time to explain the basics to him, and then reallocate.

I would never advise someone to dump it all in one fund, unless it was an appropriate target fund, with low expense ratio.

 

[Independent]

I'll be the contrarian.
How secure is her job? Engineering sounds good, but I don't know the real situation.
Is she getting into a bunch of monthly commitments (car loan, student loans, lease, cell phone, cable TV,...)?
Does she have an emergency fund?

For some young people, a 401k is the most practical way to set up an emergency fund. They don't want to miss the company match, but maybe retirement savings should wait until the emergency fund gets built up. The result is a 401k with 100% allocation to the stable value fund.

Their biggest risk is getting downsized when the economy is in the tank. In that situation, they're going to use the 401k to meet the basic expenses, and they don't want to bear the loss of selling in a down market.

(Of course there are other factors. Maybe the job is very secure, or the job market is very good. Maybe Dear Dad is the real emergency fund. These facts would change the decision.)