VP in a 401K

[cnh]

I would welcome members' views on implementing a VP in a 401K.  Like several on this forum, I've decided not to try to manage a single PP across multiple taxable and tax-advantaged accounts.  I'm interested in opinions re: (1) favoring simplicity and cost (by confining my investments to 1-3 available Vanguard/American funds) or (2) favoring diversification (by investing in perhaps 6-8 funds--Vanguard, American and other).  Though several carry relatively good Morningstar ratings, the available funds are limited and include:

FUND - ER
Invesco Real Estate Fund (A) - 1.30%
Am. Funds Cap. World Gro. & Inc. Fund (R6) - 0.45%
Fidelity Independence Fund - 0.78%
JPMorgan Mid Cap Value Fund (I) - 1.02%
American Funds Fundamental Investors (R6) - 0.31%
American Funds Income Fund of America (R6) - 0.30%
Ivy Mid Cap Growth Fund (I) - 1.05%
FFTW Income Plus Fund (A) - 0.50%
MFS Research International Fund (A) - 1.22%
Oppenheimer Developing Markets Fund (Y) - 1.03%
T. Rowe Price Equity Income Fund - 0.68%
Royce Total Return Fund (Inv) - 1.15%
Vanguard Wellington Fund (Adm) - 0.17%
Vanguard Intermed. Term Treasury Fund (Inv) - 0.20%
Vanguard Mid-Cap Index Fund (Sig) - 0.10%
Vanguard Growth Index Fund (Sig) - 0.10%
Vanguard 500 Index Fund (Sig) - 0.05%

Any thoughts?

[Pointedstick]

Well, the bad news is that most of those are crap. I'd automatically avoid anything with an ER of more than about 0.40%, which cuts out most of those funds. But the good news is that you have a few diamonds in the rough:

Vanguard Wellington Fund (Adm) - 0.17%
Vanguard Intermed. Term Treasury Fund (Inv) - 0.20%
Vanguard 500 Index Fund (Sig) - 0.05%

Many like the Wellington fund, and there's nothing at all wrong with it, but my preference in this situation would be to go 50/50 with the intermediate treasury fund and the S&P500 fund. Simple, cheap, passively managed, reasonably safe bonds, and heavily in equities for a prosperity tilt that we as Americans have more likelihood of being rewarded for than many others on this Earth.

Couple that with a nice safe economically-agnostic PP and I think you're golden.

[cnh]

Well, the bad news is that most of those are crap. I'd automatically avoid anything with an ER of more than about 0.40%, which cuts out most of those funds.

Yeah, when I first saw the options, I had about the same reaction.  When one sees 401K options like this, it bolsters the perception that 401Ks are more for the mutual fund industry than the investor.

Thanks for the suggestion, which is precisely one approach I'm considering.  Can I presume that you view adding some diversification via international equity exposure -- even developing markets -- not worth the expense?

[Pointedstick]

Thanks for the suggestion, which is precisely one approach I'm considering.  Can I presume that you view adding some diversification via international equity exposure -- even developing markets -- not worth the expense?

I think it depends on the level of expense we're talking about. That smelly Oppenheimer international fund has a 1.03% expense ratio, for example. No way I'd touch that. It's gonna have to beat the U.S. index by 98 basis points per year to even achieve identical overall returns, which doesn't seem likely given that it's an actively managed fund. And historically, A low-cost Vanguard index fund has absolutely obliterated it:



Hmm, you get worse drawdowns during crashes, and less upside during the recovery, all with an expense ratio that's 20 times higher! Where do I sign up??? 

[cnh]

Interesting...I attempted to replicate your chart using Morningstar's charting function, and it produced a significantly different picture over the identical period; ODVYX didn't drawdown as much in 2008-09 and it ended the higher, not lower, in 2013.  I then replicated your chart at Yahoo! Finance, and it appeared identical to yours.  The principal difference I can see is that the y-axis in your chart (and Yahoo!) reflects percentage increase/decrease (in price?), and the Morningstar charting functions reflects growth of $10,000 net of expenses (and with, I'm pretty sure, dividends reinvested).

Do you know what your charting function does with dividends?  I can't think of any other explanation for the disparity, unless the platforms are using different price data, which would be disconcerting.

[Pointedstick]

I was just using Google Finance. Not sure what they do with dividends; probably don't even consider 'em. You might try running the same VTI vs ODVYX comparison in Morningstar and see what you find.

But otherwise I'm sort of at a loss to explain the discrepancy, since reinvesting dividends simply makes VTI smoke ODVYX even more; VTI's dividend is close to 2% while ODVYX is currently spitting out a palty 0.7%.

[cnh]

I did some further investigation, and I'm convinced the discrepancy results from charting total returns (Morningstar) versus NAV/price changes (Google Finance/Yahoo! Finance).  ODVYX produced some relatively larger dividends/capital gains 2006-2008 than VTSMX, and when I look at total return from 1/3/2006, ODVYX beats VTSMX/VTI with a deeper drawdown 2008-09 and faster recovery 2010-11.

$10,000 invested 1/3/2006 in each grows to a bit over $20,000 (ODVYX) versus a bit under $16,000 (VTSMX) by 4/30/2013.

I'll no doubt opt for Boglehead-ish portfolio, but I'm still left wondering if I should hold my nose and add some international exposure for diversification despite the expense.

[D1984]

Thanks for the suggestion, which is precisely one approach I'm considering.  Can I presume that you view adding some diversification via international equity exposure -- even developing markets -- not worth the expense?

I think it depends on the level of expense we're talking about. That smelly Oppenheimer international fund has a 1.03% expense ratio, for example. No way I'd touch that. It's gonna have to beat the U.S. index by 98 basis points per year to even achieve identical overall returns, which doesn't seem likely given that it's an actively managed fund. And historically, A low-cost Vanguard index fund has absolutely obliterated it:



Hmm, you get worse drawdowns during crashes, and less upside during the recovery, all with an expense ratio that's 20 times higher! Where do I sign up??? 

Why compare a total international index fund and an emerging markets fund? Wouldn't the apples-to-apples comparison be ODVYX vs Vanguard's EM index fund? I pulled that up at Morningstar (since Yahoo and Google Finace do not include cap gains distributions in their charts to the best of my knowledge) and went back to inception (late November 1996) for the Oppenheimer EM fund (the A share class since the Y share class didn't exist back that far) and the result was that it smoked the Vanguard EM index fund (VEIEX) pretty badly. If you'd started with $10,000 in each you would have almost $96,000 in ODMAX and just over $32,000 in VEIEX. I then had Morningstar redraw the chart back to 4-1-1998 (roughly when DFA started its EM small and EM value funds) and the Oppenheimer fund even beat those by the present day. I went back and repeated these charts for the past 10 years (starting 5-16-2003) and past 5 years (starting 5-8-2008) and got roughly the same results (beat the EM index fund significantly and either slightly beat the DFA funds or nearly tied one of them...and with somewhat lower drawdowns in 2008 and 2011).

Not an index fund, nearly pure EM with little or no exposure to non-EM non-US countries, and still rather expensive (TBH any 401K that has access to Vanguard Signal class shares ought to have enough money in it between all the participants combined that it has access to the lower expense ratio institutional class shares of Oppenheimer's funds as well) but hardly what I'd call a "smelly" fund...of course, its performance could change sometime in the future vs the index but so far it hasn't exactly stunk (and it seems the managers had the good sense to close it to new investors--at least those outside of qualified plans that were already enrolled before the fund closed--before it got too big).

[Ad Orientem]

Well, the bad news is that most of those are crap. I'd automatically avoid anything with an ER of more than about 0.40%, which cuts out most of those funds. But the good news is that you have a few diamonds in the rough:

Vanguard Wellington Fund (Adm) - 0.17%
Vanguard Intermed. Term Treasury Fund (Inv) - 0.20%
Vanguard 500 Index Fund (Sig) - 0.05%

Many like the Wellington fund, and there's nothing at all wrong with it, but my preference in this situation would be to go 50/50 with the intermediate treasury fund and the S&P500 fund. Simple, cheap, passively managed, reasonably safe bonds, and heavily in equities for a prosperity tilt that we as Americans have more likelihood of being rewarded for than many others on this Earth.

Couple that with a nice safe economically-agnostic PP and I think you're golden.

+1
Anytime you can construct a basic low cost 2-3 fund Boglehead type portfolio in a 401K you are doing fine.

[cnh]

I definitely appreciate all the comments and insights.  One final question on this topic: From the comments, should I infer a consensus view that any diversification benefit from adding some international or small cap exposure to a simple 2-3 fund Boglehead portfolio that I could create in this 401K is lost in the added expense, given the available fund choices?

[Dieter]

I had the VG Mid-Cap index for a while, and it treated me while. Probably wouldn't make a big difference, but a low cost option to add some equities not dominated by Large Cap growth.