Should I roll over my 401k? Part 3 – Vanguard Options

(Continued from Should I roll over my 401k? Part 2 – Maybe Rollover into Fidelity?)

I believe in the power of low-cost investing in well-managed index funds, as proposed by books such as Random Walk Down Wall Street and Four Pillars of Investing. So here’s what I’m considering if I roll over my 401k to a Vanguard IRA. I would probably merge it will my existing Traditional IRA there, leaving me with a balance of around just over $20k.

Option #1: One Fund
Right now my IRAs only hold one fund: Vanguard Target Retirement 2035 (VTTHX), and my wife’s hold the Retirement 2045 Fund (VTIVX). I did this do get a balance of about 85% stocks, 15% bonds. I feel I should be closer to 90% stocks, so I could put everything in the Traditional IRA into the 2045 fund. That would leave me with the following allocation:

Vanguard Target Retirement 2045 Holdings:
71.0% Vanguard Total Stock Market Index Fund
12.4% Vanguard European Stock Index Fund
5.3% Vanguard Pacific Stock Index Fund
11.1% Vanguard Total Bond Market Index Fund

Pros: No fees at all if I keep the balance above $5k. No additional expense ratio charged above the underlyings funds. Expense ratio is a lean 0.21%. No Trading costs.
Cons: I don’t get to chose when or how much to reallocate as I get older. One size may not fit all.

Option #2: 3-4 Funds
I could also do something similar to the above fund myself by buying similar underlying funds in the ratio of my choosing, a la the Four Fund Portfolio. Here’s

70% Total Stock Market Index Fund (VTSMX)- ~$14,000
20% Total International Index Fund (VGTSX)- ~$4,000
10% Total Bond Market Index Fund (VBMFX)- ~$2,000

Pros: I can reallocate easily later on as I see fit, or add other funds. No trading costs.
Cons: I will get charged $20/year each for the low balances in VGTSX and VBMFX, for a total of $40/year (Vanguard fee explanations). Not that bad, but this can also be seen as an additional 0.20% expense ratio for my $20k balance (Note: The fees can be pre-paid with non-IRA money).

If I tweak the percentages to put $5k in VGTSX, I can get the fees down to $30/year. Or I could drop the bond fund totally, and get it down to $10/year.

Option #3: Do it all with ETFs
I’m relatively new to ETFs, although I own a couple, like VNQ. Vanguard now has a lot of good ETF (they called them VIPERs) options. With ETFs, I can slice and dice as long as I pay the commissions. Commenter Sue mentioned BrownCo, which offers $5 trades and no inactivity or low-balance fees. Here’s a quick possiblity:

40% Total Stock Market VIPER (VTI)
20% Extended Market VIPER (VXF)
10% European Stock Idx VIPER (VGK)
7% Pacific Stock Idx VIPER (VPL)
3% Emerging Mkts Idx VIPER (VWO)
10% iShares Lehman Aggregate Bond ETF (AGG) (Can’t find a Vanguard Bond ETF)

Pros: Somewhat lower expense ratios. No maintenance fees, depending on broker. More flexibility.

Cons: Will pay commissions when trading and re-allocating. Need to find a new broker. If I get $50,000 in overall funds with Vanguard, I will be able to waive all low-balance and IRA custodial fees. But in order to stay with Vanguard, I will have to pay $25 for trades.

As I’m writing this, I’m more and more interested in ETFs! I have a big chunk of money, so the commissions shouldn’t be that big a deal, and it’s true that I’m not really dollar cost averaging, at least right now…

*All the funds mentioned above are no-load funds, with no 12b-1 fees.

(Read the last part, Should I roll over my 401k? Part 4 – Final Decision)

Comments

  1. You running some sort of late night blogathon? (I noticed the time that you posted these) :)

  2. Hi there.. great blog..
    I’m going through the same thing right now so I’m excited to see which you go with.. I have a current ROTH with Ameritrade (pretty happy with it), just got a new job, and I need to roll over the old 401k to a Traditional, then a new ROTH or to my Ameritrade ROTH.. I’ve been thinking about Vanguard or Ameritrade ..

  3. I prefer etfs, mostly because I don’t dollar cost average, and I think they are more flexible as an investment tool. Your portfolio mix is great. I own more international stocks. US stocks haven’t really moved this year. Good luck.

  4. Haha, yeah, I was up anyways for a project.

    Eric – I am definitely thinking of coverting to a Roth as well. But I’d be doing it gradually and at the end of the year to avoid the income restrictions. I like Ameritrade too, at least so far. I have my taxable brokerage account there at I-Zone.

    Thanks S, I’m definitely going to look more into ETFs. But first, more coffee.

  5. rorschack says:

    A month ago, I was in the same boat, trying to determine what to do with previous employer’s 401K. I rollovered to IRA and then converted to Roth. My all ETF portfolio is with Scottrade. I intend to buy and hold for 20+ years. As for asset allocation, my target is:
    45% US Equities (15%=IVV, 12%=VXF, 9%=VB, 9%=VBR)
    30% Foreign Equities (15%=VWO, 10%EFA, 5%=probably EWA or EWJ)
    10% REITS (VNQ)
    15% Bond (7%=TIP, 8%=AGG)

    I’m still waiting for good entry point for REITS and Bonds since REITS is way overvalued right now and it’s not a good time to get into Bonds with rising interest rate.

    Here are a few great URLs for ETF/Asset Allocation research:

    http://www.radicalguides.com/2005/06/the_radical_gui.html
    http://www.fundadvice.com
    http://www.eustis-invest.com/
    http://www.evansonasset.com/index.cfm?Page=19

  6. It looks like option #2 is the best (I’m doing something similar) if you invest monthly or the amounts aren’t large enough to offset the “maintenance fee” of buying and selling ETFs.

    It looks to me like the account maintenance fees are $10 per fund, for a $20 per year total on the two funds under $10,000.

  7. Well, if I go under $5k for each fund, then there is the IRA custodial fee of $10/year in addition to the Index low-balance maintenance fee of $10/yr.

  8. I guess I’m missing something. If you have 3 funds at $5K per fund in one IRA, the IRA is over $10K and isn’t subject to the maintenance fee. The maintenance fee is based on a total of $10K, not whether each component is over $10K.

  9. Actually, the maintenance is per ‘fund account’. From the Vanguard Website:

    “Each individual mutual fund you own is a distinct account. For example, if you own Vanguard? 500 Index Fund and Vanguard? Total Bond Market Index Fund in your IRA, you have two separate fund accounts?not one IRA “account” holding two funds?and separate account fees apply accordingly.”

    The first, oh, 20 times I read it, I read it the same as you! But I finally called up Vanguard and this is how they define it.

  10. Hmmm… I could’ve sworn they told me something different, a while back. Yes, the account fees per individual fund would apply to all below the minimum, but the IRA maintenance fee only applies to the aggregate of all assets within the IRA.

    Right now, my IRAs at Vanguard all contain a single fund, but I will be **very** sure about how the IRA maintenance fee applies before adding investments to my IRAs, since I might be subject to that maintenance fee for a couple of years.

    Either way, based on what they told you, the math at least makes sense to me now.

  11. Yep, it’s all outlined here more clearly:

    Vanguard Fees

  12. Vanguard and fidelity funds have been torched by funds with real money managers

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