PP Heresy: Recommendations for a Boglehead 401k

[Ad Orientem]

Do they allow index funds (not ETFs)? If so I would go with VBMFX. Actively managed is tough, but one good and cheap option is VWINX. Another might be to just go with PRPFX. But PIMCO Total Return is not a bad choice. They have a stunning track record though I cringe at any ER over.25%

[melveyr]

I would probably just go for whatever index fund has no transaction fee. Also, if you are sold on the idea of total market investing, keep in mind that the "total" bond market indices exclude TIPS! If you are not holding gold in a portfolio I think TIPS are better than no TIPS. Another thing you could think about is doing just a simple stocks/TIPS portfolio. That's pretty powerful combination wrapped up in just two instruments.

[KevinW]

I think this is sensible. Especially so if you're someone who switches jobs every few years. When you separate from an employer you can roll the 401k, which only has a few years' contributions, into an IRA implementing a pure PP. So the non-PP portfolio never gets too big in this case.

Here are the alternatives I would consider, in my personal order of preference.

1)
1/2 total world stock index (or 1/4 TSM, 1/4 total international)
1/2 intermediate Treasury index (or total bond market index)
This has a lot of structural commonalities with the PP, though I expect it to be more volatile. Total world stock index funds are hard to find in 401(k)s.

2)
A fund-of-funds portfolio using 100% index funds with stocks in the 30-40% range.
Set it and forget it.
E.g.
Vanguard Target Retirement Income
Vanguard LifeStrategy Conservative Growth
Note that Fidelity's fund-of-funds portfolios all include actively managed funds with high expenses.
Many 401(k)s have homebrew target-allocation funds which are OK.

3)
1/6 TSM
1/6 total international
2/3 total bond market
A by-the-book conservative Boglehead allocation with equal domestic-international weighting.

4)
1/3 TSM
2/3 total bond market
Even simpler, and feasible in practically every 401(k). However there is no currency diversification.

***

Which mutual fund families can you buy through the brokerage window? IMO the best are Vanguard's core funds and Fidelity's Spartan family.

[Ad Orientem]

FBIDX sounds like a winner to me.

[notsheigetz]

I admit to being a heretic. I just transferred both mine and my wife's Roth IRA's to Vanguard and bought VWINX. I like that it simplifies things by taking two accounts out of the PP juggling challenge between so many accounts and also it adds what I think is some diversity to the PP  (dividend paying stocks and corporate bonds).

That's only about 7% of my portfolio right now but I'm planning on moving it up to around 20%.

[Ad Orientem]

I admit to being a heretic. I just transferred both mine and my wife's Roth IRA's to Vanguard and bought VWINX. I like that it simplifies things by taking two accounts out of the PP juggling challenge between so many accounts and also it adds what I think is some diversity to the PP  (dividend paying stocks and corporate bonds).

That's only about 7% of my portfolio right now but I'm planning on moving it up to around 20%.

No criticism from this quarter. VWINX is an excellent fund and one of probably no more than five actively managed that I would recommend. Presuming you hold some gold elsewhere I think you are fine.

[sophie]

I'm in something of the same position.  I just don't have enough space outside my 403(b) to handle a rebalance into gold, which I expect will soon hit the 15% band.  If necessary, I'll convert some of the cash in one account at Vanguard to either Wellesley or a target date retirement fund, depending on how the coin flip goes.

Any useful recommendations for TIAA-CREF annuity funds?  CREF Stock is an unusual beast in that it's actively but conservatively managed, includes a 30% allocation to international, and has an expense ratio only 6 basis points higher than their stock index fund which has no international.  TIAA Real Estate is a unique investment (invests directly in commercial real estate rather than managing companies), and Traditional is a great stable value fund (min 3% which it's at now).  These funds have a catch though:  at least in my plan, you can't rebalance out of Traditional without making a phone call, and then you can only get 10% at a time (10-year transfer payout).  Real Estate has a less draconian restriction, but it's not entirely free either.

I currently have the following:
40% CREF Stock
20% Real Estate
20% Inflation Linked Bond
20% CREF Bond

and am debating switching half or even all of the bond funds to Traditional.  The return rates should increase if inflation comes knocking, and real estate will help compensate for any negative real return problems.  There won't be much opportunity to rebalance into stocks, though, if I put the full 40% into Traditional, and if stocks and real estate drop together I'll just be thankful for the PP.

Note that CREF Bond has enough corporates that I don't think it will provide much useful diversification for stocks.  Inflation Linked Bond is 100% treasuries (mainly TIPs) so it can potentially take that role.  It's the only Treasury fund available in the lineup.

Finally - the target date retirement funds at TIAA-CREF are a ripoff.  Expense ratios are about 2%, and they're also way too heavy into stocks in my opinion.  They put a 40 year old into 90% stocks for example.  AVOID.

[notsheigetz]

Any useful recommendations for TIAA-CREF annuity funds? 

No recommendations but speaking of TIAA-CREF.....

I moved from Ohio to Florida in 1981 leaving behind an account at TIAA-CREF in the amount of about $2k that I wasn't even aware of.

In 2007 I found out about it and rolled about $42k into my SEP-IRA. Not a bad ROI, I thought (especially since the $2K was the company's money, not mine).

I still have about $7k there in two different accounts that I couldn't roll over and I have no clue why. Some day after I retire I will have to call them and see what my options are. Maybe I can get a check for $20/month or something.

[notsheigetz]

I admit to being a heretic. I just transferred both mine and my wife's Roth IRA's to Vanguard and bought VWINX. I like that it simplifies things by taking two accounts out of the PP juggling challenge between so many accounts and also it adds what I think is some diversity to the PP  (dividend paying stocks and corporate bonds).

That's only about 7% of my portfolio right now but I'm planning on moving it up to around 20%.

No criticism from this quarter. VWINX is an excellent fund and one of probably no more than five actively managed that I would recommend. Presuming you hold some gold elsewhere I think you are fine.

And the .25% expense ratio for an actively managed fund with a long and successful track record was also a good selling point.

[MediumTex]

Did anyone see the "401(k)asino" illustration in the PP book?

I thought that one was great.

If you didn't see it, it shows investors wandering into a casino, except every slot machine and gambling table has the name of a different stock mutual fund on it.

[sophie]

[quote author=notsheigetz link=topic=4644.msg66999#msg66999 date=1368570408
I still have about $7k there in two different accounts that I couldn't roll over and I have no clue why. Some day after I retire I will have to call them and see what my options are. Maybe I can get a check for $20/month or something.
[/quote]

Probably they're in TIAA Traditional.  You might be able to get your money out right away if you call them, because there's an exception to the 10-year payout rule for small balances.  But...why not just leave it there?  3% guaranteed return is not shabby, if that's what you're getting.

[melveyr]

What about total market, FSTMX?

[Ad Orientem]

FBIDX sounds like a winner to me.

Yeah.

I'll probably go with 50% stock index, and 50% Spartan U.S. Bond Index.

OK, one final question on the stock index funds...

I've got three low-cost Spartan stock index funds available in my 401k: SP500 (0.05%), Extended Market (0.07%) and International (0.10%).  Thoughts?  I was thinking splitting equally between the Extended Market and International indices.

If they don't offer a global index fund I would go 25% S&P and 25% International.

[ZedThou]

Any useful recommendations for TIAA-CREF annuity funds?

In the last couple of years, my TIAA-CREF defined contribution plan has made available VTSSX, VBTSX and VTSGX (Vanguard total bond, total stock and total international stock), along with a few other odds and ends. Does yours have these options?

[sophie]

Any useful recommendations for TIAA-CREF annuity funds?

In the last couple of years, my TIAA-CREF defined contribution plan has made available VTSSX, VBTSX and VTSGX (Vanguard total bond, total stock and total international stock), along with a few other odds and ends. Does yours have these options?

That sounds like the best of all possible worlds...alas no, my plan doesn't include any Vanguard funds.

[KevinW]

Any useful recommendations for TIAA-CREF annuity funds?

The funds you described seem to have the "unholy trinity" of active management, high expenses, and onerous redemption policies. IMO I would avoid them regardless of any other redeeming qualities they might have.

The last time I looked at TIAA-CREF's lineup the only two mutual funds that looked acceptable to me were Equity Index and Bond Index. If I had to use TIAA-CREF I'd build a portfolio out of those two. Are they available to you?

Those funds are indexed and have more reasonable ERs (0.40/0.49 resp.), but are still a lot more expensive than competing products. It's too bad; I'd like to be able to diversity into two nonprofit/mutual brokers, and Vanguard is OK, but TIAA-CREF is really not conducive to the PP.

[sophie]

The Equity index fund has an ER of 0.43.  CREF Stock has an ER of 0.49, and as I said it includes 30% international, so I doubt there's much room for active managing.  Over time it's done no worse than the index fund.  Also, a friend of mine knows one of the managers of CREF Stock, and he (the manager) said they basically follow an indexing philosophy even though the fund isn't technically an index.

I believe TIAA's bond index is a mutual fund.  The one in my plan is CREF Bond, which has an ER of 0.41 and includes international bonds.  Both CREF Stock and CREF Bond are annuities.  It doesn't really make sense to incorporate TIAA investments into the PP, because the whole point of investing with them is to convert the accounts to an annuity upon retirement.  I think it'll end up being a nice complement to the PP, but it's giving me quite a headache trying to figure out if the annuity perk is worth the high expense ratios.

[smurff]

I've often wondered whether the TIAA CREF model for retirement portfolios will be used as a model in light of current 401K insanity.  An arrangement where anyone (not just education industry) can sign up with them to administer their retirement account based on annuitizing at some future point.  Of course, brokerage firms probably won't stand for it.

[sophie]

I've often wondered whether the TIAA CREF model for retirement portfolios will be used as a model in light of current 401K insanity.  An arrangement where anyone (not just education industry) can sign up with them to administer their retirement account based on annuitizing at some future point.  Of course, brokerage firms probably won't stand for it.

HB himself suggested annuities as a private alternative to Social Security on one of his radio shows.  I must say I rather like the idea of having a conservative investment program with guaranteed lifetime income to cover basic living expenses after retirement.  It would be nice if it were the PP, but TIAA Traditional is not at all a bad alternative.

HB's idea is the only intelligent suggestion I've ever heard for reducing that particular entitlement program and meeting the goal of keeping elderly people out of poverty.  Paul Ryan are you listening??  But then, I'm not at all convinced that the Republican Party (or the Democrats for that matter) care a whit about whether people starve to death or die of untreated cancer at age 80, after a lifetime of working to feed the system.  Also, it's likely that most of the SS money actually goes to people on SSI (disability).

[smurff]

There are a lot of people receiving Social Security benefits besides retired workers.  Dependent spouses of those retired workers, permanently disabled workers and their dependent children, low income disabled workers and their dependents (SSI), disabled children (SSI) without regard to family income, widows and surviving children of deceased workers.  At one time there was even a payment to survivors when the retired or disabled person died, but that was changed to limit this to very low income deceased. (I don't know if they still have this benefit.)  Many more people than a typical annuity or disability policy would cover.

[notsheigetz]

There are a lot of people receiving Social Security benefits besides retired workers.  Dependent spouses of those retired workers, permanently disabled workers and their dependent children, low income disabled workers and their dependents (SSI), disabled children (SSI) without regard to family income, widows and surviving children of deceased workers.  At one time there was even a payment to survivors when the retired or disabled person died, but that was changed to limit this to very low income deceased. (I don't know if they still have this benefit.)  Many more people than a typical annuity or disability policy would cover.

Don't forget the $255 spousal death benefit. That's what I got when my wife died - the sum total for all of her contributions during her lifetime. This is the biggest weakness in SS in my opinion, and why private accounts would be better. If you die before reaching retirement age, you have nothing to pass on.

[D1984]

There are a lot of people receiving Social Security benefits besides retired workers.  Dependent spouses of those retired workers, permanently disabled workers and their dependent children, low income disabled workers and their dependents (SSI), disabled children (SSI) without regard to family income, widows and surviving children of deceased workers.  At one time there was even a payment to survivors when the retired or disabled person died, but that was changed to limit this to very low income deceased. (I don't know if they still have this benefit.)  Many more people than a typical annuity or disability policy would cover.

Don't forget the $255 spousal death benefit. That's what I got when my wife died - the sum total for all of her contributions during her lifetime. This is the biggest weakness in SS in my opinion, and why private accounts would be better. If you die before reaching retirement age, you have nothing to pass on.

I'm pretty sure the program designers would say that from an actuarial standpoint the "heirs get little or nothing and the social security taxpayer himself cannot get access to the money itself except as an income stream and if he dies early....well, tough cookies" would be a feature and not a bug. The whole point of a retirement income program (like SS or for that matter like an immediate annuity) is to provide a retirement income stream that can never be outlived. Giving the heirs a "return of all the contributions paid that weren't paid out as benefits" would involve either seriously cutting the monthly benefit or increasing the FICA tax (since those who die early subsidize those who live past their life expectancy).

Now, with that said, annuities are voluntary and Social Security isn't (althogh I take it that you...and most everyone else on this board...would agree with me that SS should be voluntary) but that still doesn't change the fact that trying to make one part of the program a "better" deal (for the heirs) would make another part "worse" (for those who are receiving retirement income). A QLAC/annuity/tontine--whether private or government provided--shouldn't also be in essence a "brokerage account" or "life insurance policy" (which is why  I also think survivors' benefits are a bad idea); the two concepts are really like oil and water.

[Libertarian666]

Now, with that said, annuities are voluntary and Social Security isn't (althogh I take it that you...and most everyone else on this board...would agree with me that SS should be voluntary) but that still doesn't change the fact that trying to make one part of the program a "better" deal (for the heirs) would make another part "worse" (for those who are receiving retirement income). A QLAC/annuity/tontine--whether private or government provided--shouldn't also be in essence a "brokerage account" or "life insurance policy" (which is why  I also think survivors' benefits are a bad idea); the two concepts are really like oil and water.

I have a private annuity with a refund provision for the remaining value if the annuitant dies before getting his original investment back. I don't see anything wrong with that.

And I do know something about actuarial science, having passed a couple of the ASA exams (although it was many years ago).

[notsheigetz]

There are a lot of people receiving Social Security benefits besides retired workers.  Dependent spouses of those retired workers, permanently disabled workers and their dependent children, low income disabled workers and their dependents (SSI), disabled children (SSI) without regard to family income, widows and surviving children of deceased workers.  At one time there was even a payment to survivors when the retired or disabled person died, but that was changed to limit this to very low income deceased. (I don't know if they still have this benefit.)  Many more people than a typical annuity or disability policy would cover.

Don't forget the $255 spousal death benefit. That's what I got when my wife died - the sum total for all of her contributions during her lifetime. This is the biggest weakness in SS in my opinion, and why private accounts would be better. If you die before reaching retirement age, you have nothing to pass on.

I'm pretty sure the program designers would say that from an actuarial standpoint the "heirs get little or nothing and the social security taxpayer himself cannot get access to the money itself except as an income stream and if he dies early....well, tough cookies" would be a feature and not a bug. The whole point of a retirement income program (like SS or for that matter like an immediate annuity) is to provide a retirement income stream that can never be outlived. Giving the heirs a "return of all the contributions paid that weren't paid out as benefits" would involve either seriously cutting the monthly benefit or increasing the FICA tax (since those who die early subsidize those who live past their life expectancy).

Now, with that said, annuities are voluntary and Social Security isn't (althogh I take it that you...and most everyone else on this board...would agree with me that SS should be voluntary) but that still doesn't change the fact that trying to make one part of the program a "better" deal (for the heirs) would make another part "worse" (for those who are receiving retirement income). A QLAC/annuity/tontine--whether private or government provided--shouldn't also be in essence a "brokerage account" or "life insurance policy" (which is why  I also think survivors' benefits are a bad idea); the two concepts are really like oil and water.

I wasn't really advocating a change to SS, just pointing out why I think it's a raw deal for a lot of people.

Also, I just read an article about how we've reached a tipping point where the average person is going to receive less in benefits than they paid in. I think this will be doubly true for those whose spouses died prematurely before retirement.

[D1984]

Now, with that said, annuities are voluntary and Social Security isn't (althogh I take it that you...and most everyone else on this board...would agree with me that SS should be voluntary) but that still doesn't change the fact that trying to make one part of the program a "better" deal (for the heirs) would make another part "worse" (for those who are receiving retirement income). A QLAC/annuity/tontine--whether private or government provided--shouldn't also be in essence a "brokerage account" or "life insurance policy" (which is why  I also think survivors' benefits are a bad idea); the two concepts are really like oil and water.

I have a private annuity with a refund provision for the remaining value if the annuitant dies before getting his original investment back. I don't see anything wrong with that.

And I do know something about actuarial science, having passed a couple of the ASA exams (although it was many years ago).

The "wrong" (not morally or legally wrong, just wrong from a retirement income perspective) is that by having an installment refund to beneficiaries the amount of income is reduced (since those who die early no longer fully help subsidize those who live longer than life expectancy since the early deceasers' remaining money instead goes to beneficiaries). For instance, assuming a $100,000 immediate annuity on a 65 year old male (data taken from http://immediateannuities.com ); for a "payment for life" he gets $554; for a "payment for life with installment refund to beneficiaries" he only gets $504...that's a 9% cut in income. For a true tontinized annuity (which SS in many ways resembles since those who die before payouts start get nothing despite having paid in for years) the benefit cut effect vis-a-vis an installment refund annuity would be even more pronounced since you no longer have the "paid in but never received anything" people to subsidize the "live to 100" types since those who died before receving anything would (unlike today) have their SS tax payments refunded back to their beneficiary/ies.

Now, having said that, should SS probably offer a choice of "payment for life only" vs "installment refund to beneficiaries" with the caveat that one would know from the outset that if he/she chose the latter monthly benefits would of course be lower? Fine by me but it would probably have to be done along with an overall system reform/privatization starting with the people who are just now beginning to pay into the system since those who have already paid into it had all their money spent paying the previous generation's benefits and the previous generation in turn had all ITS money spent paying THEIR previous generation's benefits all the way back to the generation who retired in the 30s, 40s, and 50s who got an enormous free lunch.