Is my first 401(k) fund allocation reasonable, and with respect to fees?

Question

I just started my first job after school and am now being enrolled in my company's 401k plan, which is handled by Vanguard. By default, I was put into the Target Retirement 2050 Trust II fund, which is a managed fund that has fees of 0.13%.

I am not sure if 0.13% is a high fund fee or not, but I figured a way to stay away from those fees was to manage the fund myself and then just try to mimic the fund allocation for my target retirement date.

Right now the Target Retirment 2050 Trust II fund is 90% stocks and 10% bonds. So I re-allocated my fund contributions to the following funds:

• 90% Vanguard Institutional Index Fund Institutional Plus Shares: fees of 0.02%.

• 10% PIMCO Total Return Instl: a bond fund with no fees as far as I can tell.

Then the plan would be to re-check my 401k on a monthly basis and make sure that my allocations are mimicking the allocations of the 2050 Target Retirement Fund. Does this seem like a good idea or not?

Answer 1

That's a lot of manual checking-in to see if everything is performing the way you "want".

Not to insult your intelligence, but that is not your job, and doing that on a monthly basis is going to eat a lot of time. Plus, most 401(k) programs have lockout periods wherein changes can't be made without incurring additional fees (related to distributions, etc). And if you're checking that often, you are [likely] losing the benefits of investing in mutual funds to start with.

If you have the stomach to handle the risk, go for the high-risk investment vehicles early in your career - you can afford a 30% drop this year if you then make 105%, 15%, or 50% back each of the next 5.

If, on the other hand, you're in your mid-career, switch to more conservative management tactics.

Answer 2

0.13% is a pretty low fee.

PTTRX expenses are 0.45%, VINIX expenses are 0.04%. So based on your allocation, you end up with at least 0.08%. While lower than 0.13%, don't know if it is worth the trouble (and potentially fees) of monthly re-balancing.

Answer 3

Vanguard might be the top provider of no-load mutual funds around. Attempting to do better than 0.13% in fees is just as likely to cost you more time than the money you're attempting to say. You're in your first job out of school--you've got better things to do with your time.

Answer 4

Anything under 0.20% is "really good, leave it alone." However, since you have access to their institutional funds, it isn't unreasonable to come up with your own desired asset allocation and save another half of the fees.

If you're happy with the Target Retirement date fund, just stick with it, but if you've got a particular AA you want to maintain, go for that with the cheaper underlying funds.