Many of us are faced with the dilemma of putting money into a 401k due to the tax-advantages, but only being presented with limited investment options. Personally, up until now to have 401k’s all run by the giant Fidelity, but this time around we were faced with smaller company. I’ve never heard of them before, so I’ll just call them “In House” funds.
Here’s how I systematically picked out the best funds from my menu of choices. It follows my investment belief that the best long-term performance can be gained with primarily passive, low-cost, and asset-allocated portfolios.
As a preface, I should say that I treat all my accounts as one – 401ks, 403bs, Traditional IRAs, Roth IRAs, SEP-IRAs, and any taxable accounts meant for retirement. Even between my wife and I, all of it is taken together. I then try to make them follow the asset allocation I chose.
I’m not a financial professional, so don’t take this as financial advice, ya hear? It’s just what I did:
1) Make a list of each mutual fund, including the name, the asset class it represents, any front-end or back-end loads, and the net annual expense ratio. You may need to read the prospectus for each fund, or at least grab the ticker symbol and use the quote from Morningstar.com to determine these values. Here’s my list, luckily all of them were no-load funds:
|Available 401(k) Options|
|Fund Name||Asset Class||Expense Ratio|
|Guaranteed Pooled Fund
(Fixed Interest Rate of 4.65%)
|PIMCO Total Return Admin (PTRAX)||Intermediate-Term Bond||0.68%|
|Dodge & Cox Stock (DODGX)||US Large Cap Value||0.52%|
|In-House S&P 500 Index Fund||S&P 500 / Large Cap Blend||0.30%|
|In-House Equity Growth Fund||US Large Cap Growth||0.90%|
|Lazard Mid Cap Open (LZMOX)||Mid Cap Blend||1.18%|
|Columbia Small Cap Value II
|Small Cap Value||0.97%|
|Baron Small Cap (BSCFX)||Small Cap Growth||1.33%|
|In-House International Equity Fund||International Stock||1.15%|
|5 Different Asset
|Varying Fixed Asset Allocations, from 90% Bonds/10% Stocks to 10% Bonds/90% Stocks||0.79-0.99%|
2) Throw out any asset classes that aren’t included in your chosen asset allocation. For example, I am not interested in any stable value/money market funds, or any Small Cap Growth funds for my retirement portfolio right now.
Now, if you really want simplicity and don’t have many taxable assets or different accounts to split between, I think the all-in-one Asset Allocation funds are an acceptable (though often overpriced) option in many cases. Just try to make sure the expenses are at least lower than 1%. If so, you can just stop here. I like having control myself, so I’ll pass.
3) Within the same asset class, find the difference in expense ratios between the mutual funds options you have in your 401k, and the funds you have available elsewhere. One of the best predictors of relative performance is the different in expense ratios. So here I try to find the “best deals”. For example, I can get a Small Value Index fund from Vanguard for 0.23% vs. 0.97% here, a difference of 0.74%. But for the Large Value class the difference between Vanguard and Dodge & Cox is only 0.31%.
It can be hard finding an exact asset class match between active funds and index funds, but I really don’t try to split hairs too much. It’s all about doing the best you can. Also remember it matters more depending on how much if it you’re going to buy.
4) Screen them according to these criteria for actively-managed mutual fund companies. This can be difficult, but it can be worth some legwork if the pickings are slim and you have some close decisions to make. In the case of passive index funds, obviously the management company doesn’t matter very much; just focus on expense ratios.
Balancing all this with other considerations, including minimum investment balances and size of accounts, pick out the best 401k funds to complete your asset allocation as a whole. In my case, I think the three funds that I like most out of these choices are:
Dodge & Cox Stock (Large Value) Fund
In-House S&P 500 Index Fund
PIMCO Total Return (Bond) Fund
The Dodge & Cox fund has a reasonable expense ratio as I’ve mentioned already, and has overall positive management characteristics. The S&P 500 index fund is only more expensive than my Fidelity options by 0.20%, but it is also one of the few index funds I can obtain in my Self-Employed 401k over at Fidelity. Also, that fund has a $10,000 minimum. Finally, the PIMCO fund also ranks well, although bonds aren’t a huge part of my asset allocation.
The final step is to figure out the proper percentages between them, in order to mesh with all my other accounts. I’ll do that later. I love that about tax-shielded accounts, that you can rebalance at any time without having to worry about tax consequences.
This post will be added to my Rough Guide To Investing.