My 401k's expense ratios, Bogle, lowest-cost quartile data for stock funds?

[Dude]

Hi all,
John Bogle states in his book Common Sense on Mutual Funds, that if you are going to attempt to select actively managed funds, "the surest route to top-quartile returns is bottom-quartile expenses". He states that the lowest-cost quartile for LARGE CAP STOCK FUNDS would have expense ratios of 0.5% maximum.

However, I do not see in his book any lowest-cost quartile expense ratio numbers for Mid-Cap, Small-Cap, or Foreign stock funds. Anybody know where I can find this info, or do you have any rules of thumb for these asset classes that you could share?

I have about 45 investment choices in my 401(k) (large company with 80,000 employees worldwide) and I'm trying to come up with a short list of the best prospects for a long-term (30 year) plan.

If anybody is interested, heres a list of most of the fund expense ratios I have in my plan (thought it might be useful for comparison to your own plan, plus I'm home sick and have nothing better to do!):

Large Cap Growth
3 actively managed funds, 0.63%, 1.24%, 0.22%

Large Cap Blend
3 actively managed funds, 0.85, 0.70, 0.31
2 index funds, 0.05, 0.05

Large Cap Value
3 actively managed funds, 0.72, 0.68, 0.24

Mid-Cap Growth
2 actively managed funds, 0.99, 1.05

Mid-Cap Blend
2 actively managed funds, 0.70, 0.92

Mid-Cap Value
1 actively managed funds, 0.69

Small-Cap Growth
2 actively managed funds, 1.04, 1.40

Small-Cap Blend
2 actively managed funds, 0.98, 0.92

Small-Cap Value
1 actively managed funds, 1.05

World
1 actively managed funds, 1.18

Foreign
1 index funds, 0.20
5 actively managed funds, 0.93, 0.70, 0.93, 0.84, 0.82

Specialty
actively managed healthcare fund, 0.70
actively managed Real Estate Security fund, 0.76
actively managed technology fund, 0.81

Asset Allocation
actively managed Fidelity Freedom fund, 0.75

Balanced
3 actively managed funds, 0.64, 0.63, 0.86

Bond/Managed Income - Intermediate Term
1 index funds, 0.10
1 actively managed funds, 0.43

Bond/Managed Income - Stable Value
1 actively managed funds, 0.24

Bond/Managed Income - International
1 actively managed funds, 0.80

Short-Term Investments
1 actively managed funds, 0.23

 

[Dude]

What criteria do the "best" funds in your 401(k) have to meet for you to put money into them?

 

[justin]

What criteria do the "best" funds in your 401(k) have to meet for you to put money into them?

Low expenses, low turnover.

 

[Dude]

justin,
Could you please define what you think low expenses (in terms of expense ratio) and low turnover (in terms of %) are for:

US Large Cap stock funds
US Mid Cap stock funds
US Small Cap stock funds
Foreign stock funds
Bond funds (US and/or International)

Thanks.

 

[justin]

for index funds:
US Large Cap stock funds - 0.25% ER; 10% turnover
US Mid Cap stock funds - 0.25% ER; 10% turnover
US Small Cap stock funds - 0.30% ER; 15% turnover
Foreign stock funds - .4% ER; 10% turnover

for actively managed funds:
US Large Cap stock funds - 0.5% ER; 33% turnover
US Mid Cap stock funds - 0.5% ER; 33% turnover
US Small Cap stock funds - 0.6% ER; 50% turnover
Foreign stock funds - .6% ER; 33% turnover

Just my gut feelings. There would have to be a compelling reason for me to accept anything worse than this. Like those were my only options in a 401k. In your case, the large cap blend index funds and the international fund with ERs of under 0.2% look very good (I'd personally invest in these). Also, the bond funds at 0.1 or 0.2% are good.

 

[Dude]

justin, thanks for taking the time to reply, very helpful to me getting a handle on this.

Anybody else have an opinion?

 

[Dude]

Do you agree with Bogle's rule of thumb that turnover costs equal 1% of turnover rate?

For example, 50% turnover adds about 0.50% to a funds "all-in" costs (i.e. expense ratio + portfolio turnover costs).

If not, how do you figure it?

 

[renferme]

my opinion: if using Vanguard, their funds have low expenses, even the actively managed ones.
10 year history is meaningful to me as is Beta.
Of course I know that past history is not indicative of future returns.
I prefer funds that will do decently in bear markets, such as Wellington.
I'm not interested in beating the market; I'm interested in not losing during bear markets - and Vanguard has some good funds that did ok during the lean years of 2000 thru 2002.

 

[ats5g]

Dude,

The Zero Alpha Group posted a study, MUTUAL FUND BROKERAGE COMMISSIONS in 2004 that estimated that 100% turnover added 0.36% to the expense ratio for large cap stocks, on top of the existing expense ratio and brokerage commissions. You can usually find the brokerage commissions of a fund in its Statement of Additional Info [SAI].

- Alec

 

[justin]

Do you agree with Bogle's rule of thumb that turnover costs equal 1% of turnover rate?

For example, 50% turnover adds about 0.50% to a funds "all-in" costs (i.e. expense ratio + portfolio turnover costs).

If not, how do you figure it?

I don't try to determine turnover costs directly. I just acknowledge that the higher the turnover rate, the higher the costs are. And those costs aren't included in the expense ratio. An equity fund w/ 300% turnover is going to incur HUGE transaction costs versus an index fund w/ 7% turnover. The more "exotic" you get, the more the transaction costs are (think emerging mkts, small cap - lower liquidity, higher bid/ask spread, more market impact costs for large purchases, etc).

I also have a fundamental concern with funds that make short term bets. A 33% turnover rate equates to an average holding period of 3 years. Holding stocks for much less than that (on average) isn't investing, it's gambling. In my opinion.

 

[Dude]

Thanks guys for all the help, I've printed this one out for reference as I dive into my plan's investments.

I've got 1/2 our retirement money over at Vanguard in Roth IRAs invested in Target Retirement 2035, and the other 1/2 in my 401(k) in Fidelity Freedom 2035 (asset allocation life-cycle funds).

I'm going to take a look at my other 401(k) investments, identify the best, then decide if I can do better than the Freedom fund, which has an expense ratio of 0.75% (kinda high). Although I'm not sure what makes me think I'm any smarter than the professionals who put together this fund

Must be da "hormones"

 

[cute fuzzy bunny]

I'd shoot my plan administrator and then load up on the ultra cheap large cap blend indexes and balance out my portfolio with taxable/Roth accounts in other asset classes as I went along.

But then whenever I see a fund charging more than ~.35% I usually mutter "too frickin expensive" and keep looking...

 

[Dude]

I'd shoot my plan administrator and then load up on the ultra cheap large cap blend indexes and balance out my portfolio with taxable/Roth accounts in other asset classes as I went along.

But then whenever I see a fund charging more than ~.35% I usually mutter "too frickin expensive" and keep looking...

Great advice, thanks. My stock/bond choices under 0.35% include:

Vanguard Morgan Growth Admiral, 0.22%
DOW Index (tracks Dow Jones Industrial Average), 0.05%
S&P 500 Index, 0.05%
Vanguard PRIMECAP Admiral, 0.31%
Vanguard Windsor Admiral, 0.24%
BGI MSCI EAFE (developed markets) Index, 0.20%
BGI US Debt (Lehman Brothers Aggregate Bond "total bond market") Index, 0.10%
Fixed Income Fund, 0.24%

I guess I do have some good US Large Cap, foreign and bond choices.....I'm looking at Vanguard Windsor Adm for a value tilt.

 

[LOL!]

Since your company appears to be large, you might find that Merriman & Co have given you some fund advice for your 401(k) already. At http://www.fundadvice.com/401k-help/401k-plans/401k-help-introduction-2.html along the right-hand-side are links to 50 or so recommendations for fund selection for specific company 401(k) plans.

 

[cute fuzzy bunny]

Hmm...between the s&p 500, the "total bond market" equiv and the MSCI EAFE fund you've got a pretty decent core set of holdings. Windsor isnt a bad fund to create a little tilt...many of the vanguard senior management have heavy holdings in Windsor.

If you have money elsewhere, put that in some low cost small or mid caps indexes to balance out the port and you've got a pretty good set of broad indexes at fairly low costs. You're picking up at least .50% a year in ER savings. Over 20 years you'll probably beat most peoples portfolios.

 

[Dude]

I've been reading some of your old posts and I like your approach of 2/3 in a TR fund "core" and 1/3 to "explore" with.

I wish I had Vanguard Target Retirement funds in my 401(k) instead of the Fidelity Freedom funds, this would be a whole lot simpler, then I could hold TR in my 401(k) and go to Vanguard for low cost small/mid. But alas life is not always perfect, I'll figure something out. Thanks

 

[cute fuzzy bunny]

I used to slice and dice like mad...then as the slices reached better than fair value I converted them piecemeal into TR holdings. Still keeping a third in a value tilt. The taxable large cap value "third" might end up turning into a second house if one of my realtor friends coughs up a deal for me.

 

[renferme]

Bogle advocates index funds, yet he offers actively managed funds withing Vanguard ?!?!?!?!?!?!?!??!

 

[cute fuzzy bunny]

And owns a bunch of them, although he claims he wont sell them due to capital gains.

IIRC his largest holding is in Windsor, as is the rest of the board.

 

[ats5g]

From Sue Stevens @ M*:

Bogle Portfolio circa 2004

Bogle Portfolio circa 2006

What may surprise some of you is that not all of Jack’s portfolio is indexed. About 24% is invested in actively managed funds. "I own roughly 6% in Vanguard Explorer (VEXRX) (with its low costs and multiple managers, sort of an index fund cousin) and the equity portions of three 'legacy' funds that I just can't bear to sell ( Vanguard Wellington (VWENX), Vanguard Wellesley Income (VWIAX), and Vanguard Windsor (VWNEX). More importantly, these funds are broadly diversified largely with a value orientation, which is deliberate on my part."

psssttt - Note the admiral shares.

- Alec