Evaluating My Parent’s 401k Portfolio, Part 1

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After my parents learned of my interest in personal finance topics over Thanksgiving, my mom just sent me her last 401k statement and asked me what I thought. She is 55, and works for a small firm and therefore her 401k is serviced by a small company with limited fund choices. I won’t reveal total amounts, but here is the breakdown:

Dodge & Cox Income Fund
(DODIX) [Bonds]- 26%
Amer Funds Washington Mutual (RWMEX) [Lg Cap Value]- 18%
American Funds Growth Fund (RGAEX) [Lg Cap Growth] – 18%
Royce Total Return (RYTRX) [Sm Cap Value]- 9%
Columbia Acorn (LACAX) [Sm Cap Growth]- 9%
Amer Funds EuroPacific Growth (REREX) [Lg Cap Int’l]- 13%
AIM Real Estate (IARAX) [Real Estate]- 7%

Overall, it looks like her breakdown is

26% Bonds/Cash
36% Large Cap US Stocks
18% Small Cap US Stocks
13% International Stocks
7% Real Estate

Overall, her asset allocation is pretty aggressive – about 75% Equities, 25% Bonds/Cash. She does plan on working another 10 years at least though. I was pretty disappointed that she does not have any money in index funds, until I realized there is only one index fund to choose from – and that’s an in-house S&P 500 index fund that I can’t find the expense ratio for on the statement! While the rest of her funds’ expense ratios aren’t totally offensive, I’ll need to do more research into her options.

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  1. I would say that 75% equities would be fine for someone that’s 10 years from retirement. I plan to hold a significant equity position in retirement because inflation will do a lot to cash over 30 years.

    Also, I believe that the income from social security should be considered like cash/bonds that generate income in a portfolio.

    Are there any other accounts in the total portfolio (taxable, IRA, Father’s 401k)? I use Roth IRAs to complement my 401k and diversify tax risk. If you were to just look at my 401k, it might not look like a complately diversified portfolio.

    In my 401k, there is also only 1 in-house index fund with an obscene .6% AIC so I don’t even bother. My US large cap money goes into Davis NY Venture (NYVTX) instead (It’s a large cap blend with a value bent). I could also choose to put money into Amer Funds Growth Fund and Wash. Mutual, but 1. they have higher expenses than NYVTX, 2. I don’t like Wash Mut. investing style and 3. Amer Grwth is getting too big.

  2. I like the new favicon…seems more appropriate.

  3. Aaron – thanks for you comments, you bring up a good point – I really do need to actually talk to my parents more about this. My dad has his own 401k and my parents have been accelerating their contributions into IRAs. My dad did say something about having money in annuities which concerns me but we’ll have to see.

  4. Another interesting thing that you might notice in examining your mother’s 401k is that sometimes, the expense ratios are increased over what the fund normally charges. For example, I recall getting excited to hear that we were getting Vanguard Explorer as a new choice. I was planning on switching my small growth assets to this fund. However, when the fund was added, the 401k administrator (Formerly Manulife and now John Hancock) decided they would add something like 40 basis points to the AIC which made it more expensive than the fund my assets were already in.

    I complained to my human resources deparment, but I don’t think they understood why I was complaining. I think it’s wrong for them to profit off the top like this considering we already pay the administrative fee. I calculated this last year and I think it was something like 30 basis points.

  5. Yeah, annuities are one of the biggest rip-offs in the financial services industry. Here are some reasons why:

    1) Very high internal expenses

    2) Outrageous surrender penalities (for the first several years) that handcuff you to the product

    3) The insurance is nearly worthless

    4) The tax deferral aspect is WAY over-rated since index funds accomplish virtually the same thing at a fraction of the cost

    5) Money taken out of an annuity is taxed as ordinary income versus the lower (usually) cap gains tax rate

    6) Poor estate planning tool b/c the assets don’t receive a step up in cost basis at death and are taxed at the beneficiary’s ordinary income tax rate

  6. I’d suggest dropping the two LC funds and reinvest into the SP500 index fund. No matter what the fees are I bet the index fund’s fees are smaller. And the performance is probably better.

  7. I would say that the greatest thing I pulled from this post is that you were able to have an open discussion about your parents finances. That is something that was rarely discussed in my house. It had such a profound affect that exiting college I was down 70k in debt with student loans and credit cards (about 50k of which was prime plus 1% because I got the loans to pay for private school with no co-signer). Basically, it wasn’t until I left school that I began to discover what true financial planning is all about. And, it made me realize how beneficial the PF Blogs can be to this generation. An open discussion, atleast in my case, provides a thirst to learn more. Keep up the good work.

  8. Her allocation looks really good.

    As others are suggesting, I would look at the expenses the funds are charging. Luckily with my 401k with Morgan Stanley they waive all expense fees.

    My wifes startup, on the other hand, got their 401k through a buddy of the CEO. All the funds had a 5% front load!! The CEO failed to understand why this was absurd and then resented the fact that my wife did not participate in the 401k. (We were able to put more into my own SEP and 401k instead).

  9. personally, I think their holdings needs to be reviewed and repositioned. It seems to be spread too much at first glance, good luck.

  10. Your mom
    26% Bonds/Cash
    61% US Equities
    13% International Stocks

    Vanguard 2015 (VTXVX) [Average]

    52% Bonds/Cash
    38% US Equities
    10% International Stocks

    T Rowe Price 2015 (TRRGX) [Aggressive]

    29% Bonds/Cash
    65% US Equities
    6% International Stocks

    You need to find out if your mom’s ACTUALLY an aggressive investor at the current age. No matter what, she’ll need a major asset reallocation 5 years from now.

  11. “Aggressive” vs. “non-aggressive” is *so* 90’s. According to simulations that look at historical worst case & best case scenario’s everyone should be an “aggressive” or “very aggressive” investor until they die. For a recent simple discussion check out last months Money mag. …but everyone has there own view of what is true/right…

  12. The portfolio break down according to Morningstar Xray is…
    Cash 9.9%
    U.S Stocks 50.34
    Foreign 17.65
    Bonds 21.51
    Other .6

    Style diversification
    Value Blend Growth
    24 22 20 Large Cap
    9 8 7 Medium Cap
    4 2 2 Small Cap

    Medium Market Cap 14.5 billion.

  13. 25% each
    Aggr.Life Str ,
    High Yield Mkt Bond ,
    Large Cap Value indx ,
    Real Estate Invst. Trust
    I am nowise to this finance but is this looks ok, if I have 20 more years to go for a job.

  14. Wes,

    “aggressive” or “very aggressive” investor until they die?

    I guess you’ve heard of recession or market meltdown? If you’re only few years away from retirement or even in it, without extra non-retirement savings (don’t count on SS), do you come out to Steak and Shake to flip burgers in your 60’s? Can old people with potential heart disease risk survive when their portfolio’s value drops more than 20% in a year?

  15. Sandy – I used to think the same way, it was intuitive. Backtesting simulations of various portfolios show that an “aggressive” portfolio (10-15%? bonds) would have outlasted a conservative portfolio something like 90%-95% of the time. The 5-10% of the time where it did not outlast the conservative portfolio the shortfall was negligible.

    Of course, your asset mix is only a part of the plan. I think a larger part is how much you plan to withdraw per year. If you are comfortable with withdrawing 1% or 2% of assets, well then you can probably have 100% in equities.

    I’ll see you at the retirement clubhouse and we’ll compare notes. 😉

  16. Thanks for all the ideas, some good discussion here.

    Like I said, I still need to learn more about the “big picture” for my parents.

    I think my feelings initially agree with Wes, that we would not want to risk a big shortfall at an inopportune time. If this was all her retirement, I would be worried.

    What’s “Aggr. Life Str”? A time-to-retirement-based Life Strategy Fund?

  17. OK. Aggr. Life Str. fund is mix of 85%stock and 15%bonds. I am just the beginner in this. So one of your expert advice will be enough to start with.


  18. Ok, now we’re in Aug. 2009. Either during or after the Great Recession of 2008-09. What is the state of your mom’s portfolio and can we draw any lessons?

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