Retirement Plan Makeover: Need Help

[adaway]

This is a follow post to my original post on changing withholdings and adjusting retirement contributions. It will take me months to catch up on reading regarding this topic (I am learning that one that one should consider things like no load/load, expense ration, tax efficiency, and?) but I was hoping that I could get some guidance as a starter.

I have TIAACref and Vanguard investment options for my retirement plan at work. Currently my portofolio consists of TIAACref. In terms of what’s in there… I think it is a mess because I just signed up for investments with nothing to back it up.

After reading various posts in the forum it seems that Vanguard is favorable and consistently mentioned. So, I plan to make a change to begin contributions into Vanguard investments. I can make this change now, however if I do the workplace match will continue going into the TIAACref I have until about mid-year this year at which point the TIAACref investments can then be transferred to Vanguard and the workplace match can go there if I decide, as well.

My question is that in addition to my work retirement plan; I plan to open a Roth IRA sometime this year. I haven’t decided on how much I will contribute/month just yet but it could be 50, 100, 150, or 200 ( I also realize there are min. deposits for opening.) Again, after reading various threads in the forum I see Vanguard as a favorable option for a Roth IRA. I was wondering how do I eliminate redundancy by what I select for the Vanguard workplace retirement plan and the Roth IRA? I don’t have sufficient background knowledge on this topic to feel comfortable with picking individual investments and adjusting them several times during the year (but maybe down the road I will.) So, I was leaning towards for example, Vanguard Target Retirement 2045 fund. Is it a good choice to put all my workplace plan contributions (8%) into just this one fund? I realize that it offers some diversification but I just want to make sure that this is what is recommended if choosing one of the target funds or something similar as opposed to allocating a certain percent to that fund and selecting a mix for the rest percent of contributions. For the Vanguard workplace retirement choices I have, it seems like I have options to select from a variety and many of which have been mentioned in this forum on previous threads.

Also, with opening the Roth IRA, how do I go about deciding on what funds to choose for that (assuming I use Vanguard also?) Does one try to select something different from the other retirement plan (workplace?) I saw on other threads at least several times that one should try to look at the portfolio allocation as a whole. I just want direction and then I can do further research but honestly I really don’t have any idea in terms of the best approach to select investments for both.
I don’t know if this is useful, but: I am in my mid-30’s, SINK, and have around 6k in my workplace retirement fund.

TIA.

[meaghanchan]

adaway,

You should be fine selecting the TR 2045 fund for both accounts (401k and Roth IRA). At some point you may decide to supplement it (you might decide it doesn't have as much international exposure as you'd like, or you might decide you'd want to add a REIT fund) but you could stick with it all the way into retirement and it'll probably do just fine.

One thing to note is that Vanguard's funds (with the exception of the Star fund) have a $3000 minimum, so if you want to invest in it in your IRA, you'll have to get $3000 saved before you can do that. Alternately, T Rowe Price has a program where if you sign up for automatic deductions into an IRA, they waive the minimum investment. That may be one option to explore if you decide you don't want to wait until you have $3000 saved up.

[buzz]

meaghanchan is right. A Target Retirement fund should serve you well until you become more investment savvy, or indeed all the way to retirement.

[adaway]

Thanks for the replies!

Here is what I am thinking now:
After changing my contributions to 8%, I will have it go to the Vanguard 2045 target fund. At some point this year, I will make changes to have at least two different funds (one other in addition to Vanguard Target) even though the target fund is diversified allocation-wise it seems like I would feel more comfortable to have more than one fund as an additional 12% employer match will be going into that same fund.
Regarding the opening 3,000 min, I guess I will have to wait to make the above changes until I can transfer my TIAACref which would fulfill the minimum. This will be several months from now.

For the Roth IRA, I will probably not open one up until later this year. So, I will likely not select the target fund for that as I am getting a preliminary picture of the breakdown of investments I would like to see. At the very least, I can select a similar profile to the target funds but probably not.

Here is a prelim sketch that I am carving out:
80% Equity/20% Fixed Income

20% Intermediate Bonds (if there is room for this, it seems as though some fund picks for the Equity portion have mixed investments such as bonds so I will keep track of any like this and deduct the number from the 20% I have designated for this type of allocation.)

Breakdown of 80% Eq
25% International
55% Domestic

Breakdown of the 55%
10% Real Estate
Some % an Index Fund
The rest % something from large cap, mid cap (should I also include small cap here or does real estate cover small cap?)

In terms of looking at specific investments to fulfill the breakdown…I created an imaginary portfolio on Morningstar’s site and customized the display options to show evaluation factors such as expense ratio, beta, standard deviation. This allows me to do a quick comparison of funds I have to choose from.

Are there any additional factors from a fund’s monograph that would be good to include in the custom display for a quick comparison? If a fund is not labeled tax-efficient (I guess this won’t matter with a 401 or RothIRA) what factor from the stock monograph should I be looking at? Also would this be the same as finding out about capital gains tax?

Thanks again.

[humandraydel]

You've definitely got the right idea. Do a bunch of research, ask questions, and develop a well formed plan.

I like your asset allocation. Now you just have to buy the funds to make it up. It can be as simple or as difficult as you want. You could just throw all your money in the Target Retirement fund, but it will be hard to control your asset allocation like that. If you don't want the allocation that exists in the TR fund, then I would just by the underlying funds in the proportion that you want. Even 55% Total Stock Market Index, 25% Total International Index, and 20% Total Bond Index would be perfectly fine. From there you can fine tune some and add an extra 5% small cap, or 5% commodities, or 5% REITs if you want. Don't forget, Total Stock Market has some small caps and REITs in it already, so you may not want to overweight them too much.

[jIM_Ohio]

First- your investment goal needs to be clear- retirement in this case.
Second you need to define a risk profile and translate that risk profile to investments. 80% equity-20% bonds is a good start. I would consider this moderately aggressive.
Third, you need to decide how much control of the 80-20 you want. Choosing targer 2045 is "cruise control". You will not need to do much after this.
Fourth- understand internal rates of return. 90% (maybe 95% or 99%??) of return comes from the underlying holdings inside the 2045 fund. The other 1-10% of return you get is based on buying low and selling high. There are two ways to do this... one is you will buy 401k funds with each paycheck. 26 times, 24 times a year type transactions. You have no control over the timing, but the timing of the purchases will influence short term return. The second influence of buying/selling would be transactions you or your fund manager make- 2045 fund will have a fund manager which sells 4% of large cap and buys 2% of small cap and 2% of bonds for example. Another example would be you choosing to sell 4% of fund A and buying 2% of fund B and 2% of fund C.

If choosing 2045 fund, the last criteria (buying and selling) will be removed from your control- as you would only have one fund to choose from (2045) and the manager is in control of this.

In your IRA, you may choose to open an account at Vangaurd, T Rowe or Fidelity (or somewhere else) and buy a large cap growth fund. Once you get around 5k-10k in this fund, you might choose to add an international fund, mid cap fund, value fund etc... If you maintain the 80-20 allocation in the IRA, you can buy and sell within these funds (sell the ones doing well, priced high, and buy the ones not doing so well- buying low). Assuming you chose good funds, this will increase your returns a percent here or there each year.

The more aggressive and volatile the funds, the more likely an 80-20 portfolio with frequent rebalancing will help your internal return.

[kv968]

Thanks for the replies!

Here is what I am thinking now:
After changing my contributions to 8%, I will have it go to the Vanguard 2045 target fund. At some point this year, I will make changes to have at least two different funds (one other in addition to Vanguard Target) even though the target fund is diversified allocation-wise it seems like I would feel more comfortable to have more than one fund as an additional 12% employer match will be going into that same fund.
Regarding the opening 3,000 min, I guess I will have to wait to make the above changes until I can transfer my TIAACref which would fulfill the minimum. This will be several months from now.

Even though you may feel more comfortable having more than one fund (and that's quite understandable), make sure there isn't much overlap in the other fund(s) you wish to hold. The number of funds you hold doesn't necessarily add to diversification if they're investing in the same thing. Retirement funds are meant to be a "one-stop shopping" type fund where you just have that fund and that's basically it. If you'd like to add more to a particular sector or class (ie. int'l, bonds, etc...) then you should do that with additional funds.

And I would check to see if there are minimums with the Vanguard funds if you're purchasing them through an employer's retirement program because most of the time they'll be waived in that instance.

[kv968]

Here is a prelim sketch that I am carving out:
80% Equity/20% Fixed Income

20% Intermediate Bonds (if there is room for this, it seems as though some fund picks for the Equity portion have mixed investments such as bonds so I will keep track of any like this and deduct the number from the 20% I have designated for this type of allocation.)

Breakdown of 80% Eq
25% International
55% Domestic

Breakdown of the 55%
10% Real Estate
Some % an Index Fund
The rest % something from large cap, mid cap (should I also include small cap here or does real estate cover small cap?)

Here's an instance where the minimums of the funds may come to hurt you. In order for you to get just 10% of your portfolio to be in REIT's, you'll have to have a portfolio worth $30k since the minimum for that fund via Vanguard is $3000. Although I think Vanguard is great, this is where I like T Rowe better because of your ability to get in under the minimums with their asset builder program and get a head start.

[adaway]

Thank you all for the helpful feedback and reminders.

You all provided great ideas to get around the Vanguard minimum open fees (use a single Vanguard fund and add on, use T.Rowe to start and then transfer, or use one of Vanguard’s low cost min funds and then transfer.) The control vs. no control explanations is something I will take into consideration when I make my decision regarding “to target fund or not.” It looks like I will probably select individual Vanguard funds in the workplace plan to construct my portfolio balance bc min opening balance might not be an issue. For RothIRA I will look into all that was suggested.

Overall, I gather that I should look at my retirement portfolio asset allocation as a whole for both types of plans and that I should be cautious about redundancy with different funds. This is sooo true as I just analyzed what I have for my TIAACref and there was significant redundancy in my allocations.

After reading around quite a bit and taking in the feedback given above, I have more confidence to proceed with further research and select specific funds for both retirement accounts. Thanks again.

[jIM_Ohio]

Here's an instance where the minimums of the funds may come to hurt you. In order for you to get just 10% of your portfolio to be in REIT's, you'll have to have a portfolio worth $30k since the minimum for that fund via Vanguard is $3000. Although I think Vanguard is great, this is where I like T Rowe better because of your ability to get in under the minimums with their asset builder program and get a head start.

Person should consider minimum fees when constructing portfolio. Getting 10k, 30k 100k really happens over a short period of time. 3-5 years for 30k in the example above.

Retirement funds (like 2045) provide "instant diversification", no need to cherry pick other funds.

If person wants to build portfolio on their own, cherry picking each fund and asset class, take some simple steps:

1) T Rowe Price waived account fees for IRA balances above $5000. An account is considered one mutual fund. If assets are above 30k, fees on all accounts are waived.

Year 1- send 5k to fund A (IRA max)
Year 2 send 5k to fund B (IRA max)
Year 3 send 5k to fund C (IRA max)
Year 4 send 5k to fund D

after year 4, most investors would be diversified. They may not have proper asset allocation (as equal amounts in 4 funds is not necessarily what investor might want). After year 4, investor would have at least 20k (we hope), so the next 5k added could align allocation, and by year 6 could add the smaller REIT type positions without incurring any fees.

T Rowe assesses these fees in August.

Vanguard and Fidelity will play by different rules. Inquire about account maitainance fees prior to investing.

[Mikeee]

Pay attention to Annual Expenses of the Fund

Vanguard and Fidelity will play by different rules. Inquire about account maitainance fees prior to investing.

Learn also about active versus passive investing. Books written by John Bogel are pretty good for this concept.