Deferred Comp Account (401K)

[Ronin]

I'm a city employee in Calfornia and we have this company for our 401K type plan: - ICMA-RC I'm not an investment mastermind but I have my contributions maxed out ($16,500 per year). I've got 100% going to a fund called "Vantagepoint Milestone 2035 Fund" which supposedly adjusts the investments from aggressive to conservative over the life of the fund. I considered 2035 to be the date I would probably retire and I'd want the money to be invested conservatively.

Now for my question... is this a good investment strategy? Or should I divide the fund up between other available funds? Considering that I am investing so much money into it, I don't want to be making any mistakes!!!

Thanks for any advice.

[jIM_Ohio]

I'm a city employee in Calfornia and we have this company for our 401K type plan: - ICMA-RC I'm not an investment mastermind but I have my contributions maxed out ($16,500 per year). I've got 100% going to a fund called "Vantagepoint Milestone 2035 Fund" which supposedly adjusts the investments from aggressive to conservative over the life of the fund. I considered 2035 to be the date I would probably retire and I'd want the money to be invested conservatively.

Now for my question... is this a good investment strategy? Or should I divide the fund up between other available funds? Considering that I am investing so much money into it, I don't want to be making any mistakes!!!

Thanks for any advice.

You could do worse
You might be able to do better

Most of doing better would involve learning about investing, asset allocation, risks, taxes and various other issues (that is what I do). However for people which want a simple decision, choosing a target date fund (what you did) is an acceptable solution.

as an aside
"conservative" to one person and conservative to another will be different. Conservative to me means do not buy something I think is overvalued. Conservative to you probably means when you invest $16,500 this year, you do not want to see balance at $8000 next year.

Learning more even though you stick with same decision might help you.

[Ronin]

Thanks for the advice... do you know of any good publications, books, or magazines I should read to learn more?

[jIM_Ohio]

Thanks for the advice... do you know of any good publications, books, or magazines I should read to learn more?

There are two threads here for people which want to know what questions to ask. The questions range from basic math to really abstract questions which make you think.

The purpose of the questions is to make you "ask" questions (not give you answers) because what makes sense for one person might not make sense for another.

For example, one of the questions is would you rather have $10,000 earning 2% interest or $1000 earning 8% interest?

There is not one right answer, but if you think about that, and have a good answer, you can make decisions about investing yourself and not need to pay someone for the advice to tell you what your answer is.

Here are the two threads

read them, and if you do not know an answer, or how to get the answer, just post your questions to this thread (that way all answers here are specific to you). Others here helped me make the questions, they are designed for people just starting out.

http://www.savingadvice.com/forums/investing-banking/50669-questionaire-people-starting-retirement-planning.html

http://www.savingadvice.com/forums/investing-banking/50734-investment-risk-questionaire.html

If you want to read other publications, I would suggest T Rowe Price Investor, Smart Money Magazine or articles on CBS marketwatch (that is where I learned). One issue with reading publications is you are funneled into the line of thinking of the author without much debate. Forums like this are great for debate which allow multiple schools of thought to be presented as solutions to the same problem.

[jefffou]

I'm a city employee in Calfornia and we have this company for our 401K type plan: - ICMA-RC I'm not an investment mastermind but I have my contributions maxed out ($16,500 per year). I've got 100% going to a fund called "Vantagepoint Milestone 2035 Fund" which supposedly adjusts the investments from aggressive to conservative over the life of the fund. I considered 2035 to be the date I would probably retire and I'd want the money to be invested conservatively.

Now for my question... is this a good investment strategy? Or should I divide the fund up between other available funds? Considering that I am investing so much money into it, I don't want to be making any mistakes!!!

Thanks for any advice.

A few things that stick out to me.....

1. I love your contribution level. Maximizing your contribution amounts at $16,500 will pay dividends both now and later. You get a level of tax savings with these contributions (depending on your marginal tax rate) and you get tax deferral as well (any and all growth within the account will not be taxed until withdrawals are made.) Now a case could be made to contribute to about $11,500, take the $5,000 you were putting in the 401k and contribute to a Roth IRA to diversify your tax sitiuation somewhat. This approach would also give you additional investment options not available in your 401k.

2. The VantagePoint 2035 is a "fund of funds". This essentially means that there are several funds that make up this one large fund. It also means that you most likely have hundreds (if not thousands) of individual stock positions within this one fund. The benefit of this approach is that you are generally diversified (at least according to the fund mission). The drawback is that with so many positions, one may wonder if you're receiving any benefit from the mutual fund expenses that are built in to the fund. These you can't do much about.....which leads us to the next point.

3. Net Expense Ratios are at 1.04%. This is relatively cheap. Not sure what other options are available to you thru your plan, so I don't know if you could compile a porftolio any cheaper.

4. Your current allocation to stocks and bonds is about 80%-20%. This means that about 80% of your portfolio goes to the stock market, while about 20% of your portfolio is comprised of various bonds. If you do plan on retiring in or around 2035, then this somewhat aggressive allocation may be just right for you. Not knowing your tolerance for risk, I can't really determine if this is a good "risk fit" for you or not.

You mentioned that you wanted to be gradually moved to conservative investments as you grow closer to retirement. As an aside, in my opinion, the largest drawback on these target date retirement funds is that they don't recognize the need for conservativity quickly enough. Meaning, the difference between a 2035 fund and a 2015 fund are not vastly different in their approach to investing. I believe they should be.

Ronin, I'm not sure what your current tolerance for risk is. But overall, this is not a horrible choice (at least now) based solely on the cost of the funds involved and the estimated time that will elapse before the funds are needed.

My $.02

Jeff
401k Advice

[jIM_Ohio]

Jeff- good post

[jefffou]

Jeff- good post

Thanks, Jim!!!

Jeff
401k Advice

[Ronin]

A few things that stick out to me.....

1. I love your contribution level. Maximizing your contribution amounts at $16,500 will pay dividends both now and later. You get a level of tax savings with these contributions (depending on your marginal tax rate) and you get tax deferral as well (any and all growth within the account will not be taxed until withdrawals are made.) Now a case could be made to contribute to about $11,500, take the $5,000 you were putting in the 401k and contribute to a Roth IRA to diversify your tax sitiuation somewhat. This approach would also give you additional investment options not available in your 401k.

2. The VantagePoint 2035 is a "fund of funds". This essentially means that there are several funds that make up this one large fund. It also means that you most likely have hundreds (if not thousands) of individual stock positions within this one fund. The benefit of this approach is that you are generally diversified (at least according to the fund mission). The drawback is that with so many positions, one may wonder if you're receiving any benefit from the mutual fund expenses that are built in to the fund. These you can't do much about.....which leads us to the next point.

3. Net Expense Ratios are at 1.04%. This is relatively cheap. Not sure what other options are available to you thru your plan, so I don't know if you could compile a porftolio any cheaper.

4. Your current allocation to stocks and bonds is about 80%-20%. This means that about 80% of your portfolio goes to the stock market, while about 20% of your portfolio is comprised of various bonds. If you do plan on retiring in or around 2035, then this somewhat aggressive allocation may be just right for you. Not knowing your tolerance for risk, I can't really determine if this is a good "risk fit" for you or not.

You mentioned that you wanted to be gradually moved to conservative investments as you grow closer to retirement. As an aside, in my opinion, the largest drawback on these target date retirement funds is that they don't recognize the need for conservativity quickly enough. Meaning, the difference between a 2035 fund and a 2015 fund are not vastly different in their approach to investing. I believe they should be.

Ronin, I'm not sure what your current tolerance for risk is. But overall, this is not a horrible choice (at least now) based solely on the cost of the funds involved and the estimated time that will elapse before the funds are needed.

My $.02

Jeff
401k Advice

Thanks for the info too Jeff... I'll examine my fund and compare it to the 2015. If It does stay aggressive when I'm getting closer to retirement, I'll just make sure the transfer some of it into bond funds. I'd hate to have a nice retirement built up and then have another 2007-2008 market crash happen!

I am going to educate myself better by reading investing magazines & books. I will be 32 this year, so I think I need to get real serious about this retirement business.

My job currently has a CalPERS retirement where the max is 90% if you have 30 years of service. I'm not sure if I'll stay in long enough to get the max 90%, but I want to get close at least. But even though the retirement percentage looks great on paper, I dont want to rely on that entirely just in case something bad happens and they reduce the rate.

[disneysteve]

3. Net Expense Ratios are at 1.04%. This is relatively cheap.

the largest drawback on these target date retirement funds is that they don't recognize the need for conservativity quickly enough. Meaning, the difference between a 2035 fund and a 2015 fund are not vastly different in their approach to investing. I believe they should be.

I'm not sure I'd consider 1.04% "relatively cheap" for a target date fund. Vanguard's 2035 fund has an er of 0.20% so the fund here is more than 5 times more expensive.

I agree about the allocations in the target funds and that is a point of much controversy. If you compare target funds for the same year from different companies, their allocations vary dramatically. That's true both in the years leading up to the retirement date and, even more importantly, in the years after the retirement date - the glide path I think they call it. Some of the target funds stay fairly heavy in stocks well after the retirement year, which some people really don't want - and led to some substantial losses in the market correction in 2008. Folks in or near retirement saw their portfolios drop 25-30% which was devastating at that point in their lives.

[jIM_Ohio]

I'm not sure I'd consider 1.04% "relatively cheap" for a target date fund. Vanguard's 2035 fund has an er of 0.20% so the fund here is more than 5 times more expensive.

I agree about the allocations in the target funds and that is a point of much controversy. If you compare target funds for the same year from different companies, their allocations vary dramatically. That's true both in the years leading up to the retirement date and, even more importantly, in the years after the retirement date - the glide path I think they call it. Some of the target funds stay fairly heavy in stocks well after the retirement year, which some people really don't want - and led to some substantial losses in the market correction in 2008. Folks in or near retirement saw their portfolios drop 25-30% which was devastating at that point in their lives.

A big issue in retirement planning is making the funds last once a person pulls the "retirement/stop earning money" trigger.

An aggressive stock allocation in this regard would be 60% equity, and that aggressive position would imply money needs to last 30-40 years.

A conservative stock allocation in this regard might be 30-40%. This would imply money still might need to last 30-40 years.

A minimal stock allocation in this regard might be 20% or even less (100% bonds and cash??). Money still might need to last 30-40 years.


So a person invests in the 2025 fund, how is the fund company supposed to know if the person which contributed is the oldest or youngest person in the couple? How will they know if the person will likely live for 15 more years (which suggests a minimal stock allocation) or 45 more years (which suggests the aggressive stock allocation) or something between 15-45 (which suggests a conservative or moderate equity allocation).

The answer is they make a generalization (read my signature).

Another issue is many people will probably pull a lump sum out when they retire to purchase an annuity, to take the guessing game out of it for the fund company. Some fund companies have a "retirement income" fund, so the 2025 fund exists until 2030 or 2035, then all assets roll into the "retirement income" fund which is a fixed allocation.

[jefffou]

I'm not sure I'd consider 1.04% "relatively cheap" for a target date fund. Vanguard's 2035 fund has an er of 0.20% so the fund here is more than 5 times more expensive.

Maybe a better way of saying it is that the fund would be "relatively cheaper".

Morningstar Inc. analysis back in the fall of 2009. The research firm concluded that more than half the target date fund industry has annual expense ratios exceeding 1%. Given Ronin's option sits at a hair over 1%, I'd still say that what drawbacks may exist with this fund, the cost of owning this fund is not one.

Of course, given an opportunity to invest in the Vanguard 2035, I'd take it. But, compared against the class of target date mutual funds, at least Ronin is not forced into a "higher-than-average" option.

Jeff
401k Advice