Another terrible 401K quandary

[embitca]

I apologize upfront for not delurking until I needed some advice. I've been reading the forum for awhile and you are all incredibly helpful, so I know you can help me figure this out

I just started a new job this week and I am in the process of enrolling for my 401K. It's through Fidelity, but unfortunately the choices my company has selected are mostly terrible -- consisting primarily of a bunch of actively managed target funds (Freedom funds). There is no broker window availability. I already called Fidelity and asked about that. Bummer.

The only really decent options are FXSIX (Spartan S&P 500 Index fund) and Vanguard Total Bond Market, VBTSX.

I'm just trying to figure out what percentage of each I should use and I am wondering if I should use the Total Bond Market at all or just put 100% into FXSIX.

Right now, I have a very small value Trad IRA (with Fidelity) with about 15K in it. Just under 12K of that amount is in PRPFX. The rest is split almost equally between IWV and EEM.

I'd like to move a bit closer to a PP with my retirement funds. I'm assuming this means that I should move the accumulated IRA funds into other investments to make up for the limited 401K options.

My new job is entry level so I don't have a lot to worth with, but let me lay it out for you:

1. Company matches 2% contribution at 100% and 4% contribution at 50%, so I'll be contributing 6% to 401K to get the full match. Over 12 mos that will be about $3250.

2. This year I will probably still put 5000 into Trad IRA, but next year I may look into doing a Roth instead (if that makes a difference in terms of what investments to put where). At this point in time I always do my IRA contribution just before the April 15 filing deadline and will definitely be doing that with this year's funds as well. In future I may be able to budget better, but the lump sum does nicely cut down on trading fees if there are any to consider.

3. I will buy physical bullion, at least 1 ounce per year.

If my numbers are correct, that's approx:

50% IRA (Fidelity)
32.5% 401K
17.5% Physical Bullion

So based on what I have to work with, what would you recommend for the IRA and 401K going forward?

[sophie]

We all sympathize with you, regarding the limited choices in the 401K....

Can you list all the funds available in the 401K?  It's surprising (but not shocking I guess) that there is no money market or short term bond fund available.  If there is, you could split the 401K between the stock index fund and the cash equivalent fund, and then the rest would be easy.

If not, then you have two options:

1) Set up the 401K as separate from your PP.  I did this with my retirement plan, after deciding that merging it with the PP was completely hopeless.  A 50/50 mix of the the stock/total bond funds is fine, as is a Wellesley-like 35/65 split.  I'm currently having fun tracking the performance of each portfolio, and observing how nicely the PP gains steadily without the wild swings of the "conventional" portfolio.

2) Accept an impure version of the PP, with the total bond fund in place of part of your cash allocation.  If you put all your stock allocation in the 401K, you'd be left with 7.5% of the total for the bond fund.  This would comprise 30% of your cash allotment.  This might sound counterintuitive, but I think it makes more sense to count the bond fund as cash than as bonds.  The fund provides slow, steady growth (most cash-like), whereas the Treasury bond allocation needs to be as volatile as possible. 

As for the rest, you might do well to put the bonds into the IRA along with gold ETFs for the remaining 1/3 of your gold allocation, and split cash between taxable (emergency funds, I bonds) and the IRA.

Of course, depending on how approachable your human resources dept is, you might try to lobby for some sensible funds to be added to the plan.

Best of luck, and do let us know what you decide.

[embitca]

Thanks, Sophie.  The company's other benefits are really good, so that helps mitigate things a bit

These are all of the funds available:

Large Cap
RGAEX - AF GRTH FUND AMER R4
DNVYX - DAVIS NY VENTURE Y
EHSTX - EATON LG CAP VALUE A
FXSIX - SPTN 500 INDEX INST

Mid-Cap
FLPKX - FID LOW PRICED STK K

Small Cap
BSCFX - BARON SMALL CAP
WFSVX - WFA SM CAP VAL INST

International
RERFX - AF EUROPAC GROWTH R5

Blended Investments
FID FREEDOM K 2015
FID FREEDOM K 2020
FID FREEDOM K 2025
FID FREEDOM K 2030
FID FREEDOM K 2035
FID FREEDOM K 2040
FID FREEDOM K 2045
FID FREEDOM K 2050
FID FREEDOM K INCOME
FID STRAT REAL RET

Stable Value
Wells Fargo Stable Return Fund Class M

Income
PTTRX - PIM TOTAL RT INST
VBTSX - VANG TOT BD MKT SIG


I was thinking that possibly the Wells Fargo Stable Value could work for the cash allocation, but the expense ratio is .73% and the current return is .78. At those figures, I sort of figured I might as well just keep my cash in my savings account. I think the return is about the same and there's no expense ratio

I've thought about doing your no. 1 option and just doing a 60/40 split stock/bonds. You think 35/65 stock/bonds is better? Hmmmm. I never even considered weighting bonds over stocks. Then I could wait to do anything new with the IRA until I make my next contribution which would bring the total to about $20K, then I could just split it equally between four appropriate ETFs. But, then, I still kind of want to have physical bullion so maybe three ETFs and the bullion purchase outside of the accounts.

Any new thoughts now that you've seen the full 401K list?

I may try and lobby for them to add some additional index funds. This is a very large company, but they seem approachable. I may wait until I've passed my 90 day probation period though!

[MediumTex]

The S&P 500 fund is acceptable for the PP stock allocation.

The stable value fund is acceptable for the PP cash allocation (not ideal, but acceptable).

The total bond market index isn't going to give you enough sensitivity to interest rate moves, so it's not acceptable on its own, but if you put 12.5% of your bond allocation in the total bond market index fund and 12.5% in EDV in an IRA, that would probably be acceptable.

Thus, you could potentially cover 62.5% of your PP in your 401(k) plan, which should take care of you for quite a while if you are just starting at this employer.

Your situation doesn't look too bad to me.

[AdamA]

If my numbers are correct, that's approx:

50% IRA (Fidelity)
32.5% 401K
17.5% Physical Bullion

So based on what I have to work with, what would you recommend for the IRA and 401K going forward?

Fidelity IRA
25%  FSBIX
25%  FLBIX

401K
FXSIX 32.5%

Physical Bullion
17.5%

That's what I would do.  In the IRA, I'd probably use the fixed income window to buy the actual bonds instead of using the funds, but you get the idea.

Do the best you can to contribute extra money to gold, cash and bonds, but if your company matches your 401K, take advantage of that, even if your bands get a little out of whack.




 

[embitca]

You guys are definitely making me feel better about my options!

Adam, the plan you've outlined seems very simple and easy.

I think I will definitely go with using the 401K for FXSIX on its own. Over the course of the year, it's only an extra 7.5 percent and since that account is starting from 0 and the other account has 15K in it, that seems fair enough.

Now when I change things up in the IRA, should I do it now? Or just wait 1-3 years until the 401K actually has some funds in it? I'm guessing I should probably wait since otherwise that would have me not current in stocks at all if I switched out to FSBIX and FLBIX, but maybe I'm just confusing myself!

Maybe what I could do in the meantime is liquidate EEM and IWV and reallocate those funds so my IRA is 90% PRPFX/10% EDV (as I've seen suggested elsewhere on the board) and leave it like that until the 401K is funded enough to consider adjusting the allocations across the board. Does that make sense?

I guess what I'm wondering is what do people do about rebalancing during the early stages of accumulation? Do you just not worry about it so much for the first few years?

I also think that in a year or two I can probaby double my 401K contribution from 6% to 10-12% which would make the 401K and IRA contributions close to equal each year. I would do it now, but I need to build up my emergency cash fund a bit more first.

[AdamA]

Do you just not worry about it so much for the first few years?

Not only in the first few years, but also in general.  Just stay as close as you can, and you'll be much better off than most. 

You will be surprised at how options you didn't see before start to open up once you get started. 

[sophie]

The only problem with going 100% stock index fund in the IRA is what to do about rebalancing.  The stable value fund is a decent cash option.  0.78% return is a lot better than most money market funds, and close to what you'd get in an online savings account.

You can also include emergency cash funds and additional after-tax savings as part of your PP, effectively reducing the percentage of your PP represented in the 401K.

Buying bonds directly in the IRA is much better than using FLBIX, very easy to do, and has a lower minimum investment ($1000).  The average maturity in FLBIX is a bit on the short side.  You could combine it with EDV, which will incur transaction costs.

I was also excessively worried about rebalancing.  I think it is a good idea to have at least 2 of the assets in each account, but it will take a while to really absorb the fact that this won't come up more often than every 2-3 years.

[HB Reader]

I was also excessively worried about rebalancing.  I think it is a good idea to have at least 2 of the assets in each account, but it will take a while to really absorb the fact that this won't come up more often than every 2-3 years.

embitca -

I agree with sophie.  I used PRPFX (augmented with physical gold, LT Treasuries, a ST Treasury Fund and S&P500 fund) as the core of my PP for many years in the 1980s and 90s.  It was a little boring, but the real challenge was dealing with the constraints imposed by investment limitations in the constantly expanding retirement account (IRA and TSP-the government 401K) space.  With the proliferation of ETFs that are now available in IRAs, I think things have improved somewhat in that area. 

I did let some of my allocations get a little out of line (too much in stocks and cash) a few times, but in most cases if you pay attention to where your new investment contributions are going, have at least two or more of the asset classes in each account to the extent that you can, and are willing to put the new contributions into the asset class your "fortune-telling" self is often screaming at you to avoid (like cash now, or gold ten years ago, or bonds twenty years ago, or stocks three years ago) you can manage things where you don't have to rebalance through sales as often as you might think.  Also, there aren't any "PP policemen" out there so don't worry if you miss a chance to rebalance exactly at the bands (especially if you have a small PP), but do fully respect the wisdom of having each of the asset classes meaningfully represented in your PP.  Easier said than done, I admit, but doable.

When you retire, or if you change jobs and get the chance to move all or part of your 401K to an IRA, consider doing so as you obviously have more flexibility in an IRA than in most (but not all) 401Ks.  I moved my 401K (TSP) to an IRA when I retired, but we have kept my wife's somewhat smaller 401K (TSP) there because it has some good funds.  Everyone's situation is a little different and I doubt there is a "perfect" solution to the problem.    

[cowboyhat]

To follow up on HB Reader's advice, my employer's 401k is with Fidelity and the plan allows me to transfer the company matching funds to my IRA without any tax implications. Only the company matching funds are allowed and it must be into a regular IRA. Doesn't have a huge impact, but helps a little especially after the match has built up over a couple of years.

This option was not advertized by my employer in any of the documentation associated with the plan. I had to speak with a Fidelity financial planner on the telephone to make it happen. He was really nice and helpful until he found out I wanted to move the money to Vanguard. The he got frosty and difficult. Fidelity pushes hard to get you into a Fidelity IRA where they hope you will churn the match and generate some fees for them.

Also as a long term approach it may actually be worth your time to write polite letters to the HR person in charge of your company's plan. MediumTex inspired me to do this despite my reservations that it was a waste of time. At my company the 401k HR person is completely incognito, probably because otherwise they get lots of impolite letters, but we recently underwent a merger and the mask dropped for a moment in a company e-mail announcing some organizational changes.

My advice on the letters to HR would be to be extra polite and not mention anything about Harry Browne or the Permanent Portfolio. I pointed out in my letters that allowing ETF investments in the 401K would increase employee choice and reduce fees, and that allowing direct investments in Treasury Bonds would be patriotic. I almost fainted with surprise the other day when someone called me back after about 6 months to discuss my letters. They mentioned that I was much nicer to them than some of the other people that had talked to about the 401k.

Who knows? Maybe some day I won't have to chose the lesser evil.

[embitca]

The only problem with going 100% stock index fund in the IRA is what to do about rebalancing.  The stable value fund is a decent cash option.  0.78% return is a lot better than most money market funds, and close to what you'd get in an online savings account.

I can always add the Stable Value Fund later when necessary. Glad to hear it is actually a decent option!

Buying bonds directly in the IRA is much better than using FLBIX, very easy to do, and has a lower minimum investment ($1000).  The average maturity in FLBIX is a bit on the short side.  You could combine it with EDV, which will incur transaction costs.

I would love to buy bonds directly, but I swear every time I open the Fidelity bond page, I get a headache. I seriously cannot make heads or tails of what exactly I'm trying to do there. I did notice there's a tutorial on the Bond forum though so maybe I will try it!

[/quote]

I agree with sophie.  I used PRPFX (augmented with physical gold, LT Treasuries, a ST Treasury Fund and S&P500 fund) as the core of my PP for many years in the 1980s and 90s. 

I'm curious about what sort of allocation you used doing it this way. I have to say I'm pretty pleased with PRPFX as a set it and forget it option.

To follow up on HB Reader's advice, my employer's 401k is with Fidelity and the plan allows me to transfer the company matching funds to my IRA without any tax implications. Only the company matching funds are allowed and it must be into a regular IRA. Doesn't have a huge impact, but helps a little especially after the match has built up over a couple of years.

This option was not advertized by my employer in any of the documentation associated with the plan. I had to speak with a Fidelity financial planner on the telephone to make it happen. He was really nice and helpful until he found out I wanted to move the money to Vanguard. The he got frosty and difficult. Fidelity pushes hard to get you into a Fidelity IRA where they hope you will churn the match and generate some fees for them.

Well I'm happy to stay with Fidelity so I won't have a problem there. I'll have to look into whether I can do this with my employer's contribution as well. Theirs take three years to vest fully (33% per year).

Also as a long term approach it may actually be worth your time to write polite letters to the HR person in charge of your company's plan. MediumTex inspired me to do this despite my reservations that it was a waste of time. At my company the 401k HR person is completely incognito, probably because otherwise they get lots of impolite letters, but we recently underwent a merger and the mask dropped for a moment in a company e-mail announcing some organizational changes.

My advice on the letters to HR would be to be extra polite and not mention anything about Harry Browne or the Permanent Portfolio. I pointed out in my letters that allowing ETF investments in the 401K would increase employee choice and reduce fees, and that allowing direct investments in Treasury Bonds would be patriotic. I almost fainted with surprise the other day when someone called me back after about 6 months to discuss my letters. They mentioned that I was much nicer to them than some of the other people that had talked to about the 401k.

I am definitely going to give this a try. I've been thinking about what I might request. I'm thinking some more index fund options and a treasury bond fund if they aren't willing to consider direct investments in treasure bonds maybe. I think a real money market fund rather than the stable value might be worth asking for as well. I'm rather stunned they don't have one. Where do the dividends go??

I will be mentioning the expense ratios for sure.


Thanks everyone for your help. I did go ahead and put the 401K allocation as 100% to FXSIX. At whatever point I need to rebalance that I'll just buy into the stable value fund in that account, unless of course I'm successful at getting some different options added!

[MediumTex]

Also as a long term approach it may actually be worth your time to write polite letters to the HR person in charge of your company's plan. MediumTex inspired me to do this despite my reservations that it was a waste of time. At my company the 401k HR person is completely incognito, probably because otherwise they get lots of impolite letters, but we recently underwent a merger and the mask dropped for a moment in a company e-mail announcing some organizational changes.

My advice on the letters to HR would be to be extra polite and not mention anything about Harry Browne or the Permanent Portfolio. I pointed out in my letters that allowing ETF investments in the 401K would increase employee choice and reduce fees, and that allowing direct investments in Treasury Bonds would be patriotic. I almost fainted with surprise the other day when someone called me back after about 6 months to discuss my letters. They mentioned that I was much nicer to them than some of the other people that had talked to about the 401k.

If you know who to ask and how to ask, there are few things in life that can't be obtained.

[MediumTex]

I am definitely going to give this a try. I've been thinking about what I might request. I'm thinking some more index fund options and a treasury bond fund if they aren't willing to consider direct investments in treasure bonds maybe. I think a real money market fund rather than the stable value might be worth asking for as well. I'm rather stunned they don't have one. Where do the dividends go??

The stable value find isn't going anywhere.  Stable value funds are 401(k)-only creatures.

If you suggest an intermediate term treasury fund, they might add it for you.  They are unlikely to add a fund with much more than 10 year bonds because plan sponsors don't want to give you too much interest rate risk exposure (primarily because they themselves normally don't have a strong understanding of why you would want interest rate risk exposure in the first place).

Getting PRPFX added is also not a crazy idea, given how strong its performance has been in recent years.  It looks like a great fund even if you have no idea how it works.

[embitca]

The stable value find isn't going anywhere.  Stable value funds are 401(k)-only creatures.

Oh, I didn't realize that. I guess that explains why it has no symbol!

If you suggest an intermediate term treasury fund, they might add it for you.  They are unlikely to add a fund with much more than 10 year bonds because plan sponsors don't want to give you too much interest rate risk exposure (primarily because they themselves normally don't have a strong understanding of why you would want interest rate risk exposure in the first place).

Getting PRPFX added is also not a crazy idea, given how strong its performance has been in recent years.  It looks like a great fund even if you have no idea how it works.

That's certainly true. It certainly wouldn't hurt to suggest it.  Would you mention how it works or just mention that it's a fund with great performance??

[AgAuMoney]

Personally I'd never volunteer how it works, and I expect they would never ask.

I'd just say, "PRPFX has been around for a long time and has had good or great performance for decades."

A previous employer of mine had their 401(k) at Fidelity.  Great to work with, as long as you didn't want anything unusual, and a decent website.  As another poster mentioned, they really want you to stick with Fidelity (Fidelity funds the expense you pay is profit to them).  Because of that I'd not hold my breath for PRPFX.