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When I set up a 401k a few years ago, my options were pretty limited, so I simply went with a lifecycle target retirement date fund (exp ratio of 0.12%). However, I now see I can choose a passively managed S&P 500 Index fund with an expense ratio of 0.02%.

I am 24, single, have no debt, my employer matches the first 6% for 401k, and have a roth 401k option. I am also maxing out my Roth IRA into a Vanguard 2050 fund.

After reading a bunch of questions/answers here I am having a hard time understanding why I should not simply put all my 401k (roth and non-roth) into the S&P 500 Index for the near future.

I understand automatic diversification is an advantage of the target retirement type fund (though the bulk of the 2050 range are in stocks, similar to the S&P 500). I also understand a purely S&P based 401k is not ideal when I am considerably closer to retirement.

  • What factors should someone (especially younger) consider when determining whether to choose a lifecycle 401k option vs an index-type fund?
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  • Are there other funds you can use to provide the balance you seek? A .02% S&P is tough to argue with. – JTP - Apologise to Monica♦ Mar 17 '13 at 18:56
  • @JoeTaxpayer it seems there are also a few low-cost bond options as well (TIPS as well as US bonds) which are 0.05% expense ratio. It seems I can match nearly exactly the funds in the Roth IRA and save majority of that expense ratio... Having realized this I'm really finding it hard to not just reallocate into a mix of bonds/S&P... – enderland Mar 17 '13 at 19:04
  • although "diversified" amongst stocks, only 5 years ago did the S&P drop nearly 2/3rds in value, and it has taken 5 years to reach near a value that it was back then, due to a variety of accounting gimmicks by the central banks. – CQM Mar 18 '13 at 4:53
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I think we resolved this via comments above. Many finance authors are not fans of target date funds, as they have higher fees than you'd pay constructing the mix yourself, and they can't take into account your own risk tolerance. Not every 24 year old should have the same mix.

That said - I suggest you give thought to the pre-tax / post tax (i.e. traditional vs Roth) mix. I recently wrote The 15% solution, which attempts to show how to minimize your lifetime taxes by using the split that's ideal for your situation.

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  • Hmm, thanks. The 15% solution is interesting to me as well. Perhaps I should make my 401k contributions pre-tax rather than Roth (I am solidly in the 25% tax bracket as an individual right now)... I'm currently saving a total of 15% post-tax and 10% pre-tax (b/c of the company match). So complicated! :-) – enderland Mar 17 '13 at 19:22
  • Glad it got you thinking. Keep in mind, getting married might drop you back to 15% for a time. Whether it's because she makes less than you, and/or you decide to buy a house and have kids. Using that time to convert some money to Roth each year to top off the 15% bracket will help you level out your taxes, and provide some more tax free income after retirement. – JTP - Apologise to Monica♦ Mar 17 '13 at 20:22
  • I think the lifecycle plans are mostly intended for savers who don't understand asset allocation or asset classes, and who might otherwise construct a much more unbalanced portfolio on their own. – JAGAnalyst Mar 19 '13 at 21:09

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