Choosing Between Limited 401(k) Investment Options

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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 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%)
Stable Value 0.60%
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
Allocation Funds
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.

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  1. Does where you have the rest of your money affect the allocation that you use in your 401(k)?

  2. That’s a great question, Paul. I should have addressed that more clearly, and have edited the post in the beginning.

    I treat all our accounts, including my wife’s, together to form our portfolio. Then I pick and choose the best options from each to follow our target asset allocation percentages.

  3. The other thing to notice on Dodge and Cox is that in addition to positive management characteristics and low expense ratio (for actively managed), they’ve also managed to beat the S&P 500 for every trailing 5, 10, and 20 year period.

    While the past isn’t a guarantee of future results, if you have a firm that has acheived a total RoR >2% above the index for over 20 years, that’s saying something about how good the firm is.

  4. Well, I sure hope that it lasts for the next 20 years as well 😀

  5. Steve Austin says

    You allowed to say which smaller 401(k) provider offers these “in house” funds?

  6. DODGX is a great choice. The Baron Small Cap fund is probably a pretty good one as well. The Pimco bond fund is one of the better bond funds out there. Your lucky that all of them are no load funds, loaded funds are killers.

  7. I’m a little bizarro in that I have 1 foot in each boat of thought…….

    #1.) My own personal IRA is 75% US Stocks/25% int’l stocks. (100% stock allocation)

    #2.) My SIMPLE IRA via work looks like a rainbow. I’m stuck w/ Morgan Stanley so I use their Portfolio Architect which can be however many funds you want. The good part is that you can buy into funds you couldn’t otherwise afford. BUT…….they’re all overloaded MS funds.

    I *have* to do that in order to get the matching from my employer. I do it ‘cuz it’s free money, but otherwise I consider my Roth my main IRA.

    If you’ve ever read “TrevH”‘s posts over on M*, then you’ve seen the “Lumper” vs. “Coffehouse” vs. “this, that the other thing” etc. etc. etc.

    Typically a modified coffeehouse wins every time……but of course……….the past is no indicator of future results! 😉

  8. Steve Austin: I work for a huge, multinational entertainment company. Our 401k is through Fidelity, but almost all the options are “in-house” funds that give a one sentence description of what’s held in them. That’s it. On top of that, they all originated last October, so there was no history to look. It’s a crime.

    We have only 4 index funds: S&P, Small Cap, International (developed, as far as I can tell) and bond. The S&P fund is way more expensive than what I can get at Vanguard in my taxable account, and I’m too young for bonds. So, all I invest in here is the Small Cap & International index funds.

    So much for world class service when you’re in a world class company.

  9. Interesting. This is very practical advice for people who don’t know much about 401k investing. I wish I would have read this when I first started working.
    Do minimum investments still apply in your 401k? They don’t in mine.

  10. I just recently enrolled into my employer’s 401k after stalling for quite a long period of time. I know absolutely nothing about them except to sign up and put money into it.

    Well during the enrollment I was faced with about 15 different options to invest in. Since I didn’t know what I was doing I went through their little wizard thingy to see what was the best option for me. They had recommended that I put some investments in small caps, some in large caps, some in something else. That part is fine, and I did that.

    When it came to selecting where to invest I haven’t the slightest clue. I had 2 different choices for small cap, 5 for medium or large cap, so I just split the investments up evenly among them. For example, if 10% should to go small cap, I did 5% for each fund, if 25% should go to large cap i did 5% on the 5 different funds. How do you know which funds to invest in especially if you have more than one choice for each category?

  11. Your advice is very timely as I’ll be starting a new job soon and have to plot out my 401k again. With my current 401k I followed the advice of a broker, this time I’m going to try to figure it out on my own. Both exciting and a little nerve wracking. Then I have to decide if I’m going to roll my old one over or just leave it where it is (which will probably depend on what kind of options the new job has.)

  12. Steve – I’m just not sure how small this 401k provider is, I don’t want to reveal my employer. I figure it’s best to keep it vague, as there are many similar ones.

    Red – I’m sure Merrill Lynch has some funds that are less expensive than others, perhaps some overpriced index funds?

    Coffeehouse is but one of many slice-and-dice portfolios, and which one is most “efficient” is all dependent on the dataset being used.

    Michelle – Sounds like your World Class company got their 401k administration on the cheap, and passed the costs on to you 🙁 I would think the in-house funds also have to provide a prospectus, but you may have to specially request it to be mailed to you.

    Robert – I usually pick the best combination of passive, low-cost, and asset-class stable. Looked another way, if you compare two small cap funds, one should be a better combo of those three characteristics. If not, I’d choose the better management company.

    Mariette – If it’s not too small, I’d always roll over to an IRA – you get so many more options. But if it is small, I would consider just rolling it over to another 401k if it doesn’t have minimum initial investment amounts.

  13. Good advice, here are a few more principles I use for my 401k.

    First, since it’s hard to get money out a 401k mine has a looong term focus. I’m split basically 25% each for large US, small US, developed international, and emerging markets. I’m extremely aware of the risk of emerging markets (that fund is WAY up and feeling quite bubbly these days), but it is also a good long bet. We use my Roth IRA and wife’s investments to increase the US/conservative portion of the portfolio.

    Second, since I’m only given large US, small US, developed international and emerging markets as pure stock plays, I also put some money into the “2040 lifestyle” plan. This is set out far enough that it’s 95% stock. The expenses are fairly low considering the breakdown of its components, and it provides another “index” or manager to maybe slightly diversify.

    Third, I’ll take advantage of the ability to shift a portion into an IRA in a few years. This will increase my choices and open up cheap Vanguard funds.

    Fortunately my company started listing the expense ratios this year. They were VERY HIGH! Someone must have complained because they were chopped in half within months and now average about 0.6% overall. Still not great, but Vanguard awaits in 5-10 years…

  14. these choices remind me of our 401k, which is run by an insurance company and not a brokerage… specifically the first fund which sounds like an annuity. The fine print calls the arrangement a “group annuity contract.” while these are similar to normal 401ks, there are additional fees that are added to the expense ratios in the prospectus.

  15. Hmmm………..

    This wouldn’t happen to be you would it, Jonathan?? link

    The M* thread #’s are all messed up these days & can’t everything, but if you search TrevH’s threads regarding allocation *AND* assuming there isn’t excessive cost involved, a modified coffehouse always pwns…….at least in the past!

    P.S. There was a unique modified Lazyman’s too that I reeeeally liked, but I don’t have the time to look for right now. It was nearly MCH returns/SD but with only 3 or 4 funds.

  16. I’m curious to hear how people determine their total asset allocation across 401(k)s and traditional IRAs or Roths. To figure it out, I’ve been factoring down the value of my 401(k) as though I were removing the money and paying taxing on it. For example, a 50/50 split of two asset classes, each only held in either a 401(k) or a Roth, would be $100 for the 401(k) but only $75 for the Roth (assuming a tax rate of 25%). This seems right to me, but I’m not sure.

  17. Hey I have been putting my money into different ISHARES etfs, have you looked at them at all?

  18. For asset allocation, I use equal dollars whether it’s before tax or after tax for a simple reason — I can always rebalance after withdrawal where the math cancels out this issue. Quick example:

    $90K in 401K pre-tax in Stocks
    $10K in Roth IRA post-tax in REITs

    If I cash out the Roth IRA, I get back to my target by selling $9K of stock in the 401K and buy $9K back of REITs. So in the end, it didn’t matter what was pre-tax or post-tax. I ended up drawing down $9K in stocks and $1K in REITs.

    Now it does matter how much spending power I have but not the asset allocation.

  19. I forgot to add that the in-house funds are not available to retail investors anyways.

    Man, I got paid on Friday, yet my 401k funds aren’t showing up online yet! I have a feeling I’m not going to like these small-time administrators…

  20. Man, I got paid on Friday, yet my 401k funds aren?t showing up online yet! I have a feeling I?m not going to like these small-time administrators?

    My huge Fortune 100 company doesn’t put in the 401k deposits until 1 week after I receive my paycheck. I think it’s simply a function of processing savings info after paycheck amounts are known (e.g., for those paid hourly or those on leave/disability).

  21. J – We use paychex and have direct deposit. Our 401(k) contributions don’t show up in our accounts until 1 week later.

    Places like Paychex and ADP make their money from interest on clients money, not payroll fees.

    The really nice thing about a 401k with paychex is that they allow a Self Directed Brokerage account with Fidelity. That means that all my contributions, whether 401k ROTH, 401k pre tax, or 401k post tax flows directly into my Fidelity brokerage account where I can buy any stock, etf, or fund.


  22. While I *do* wish we had direct deposit………..(I just hate havin’ to go to the bank anymore)……….I do have Vanguard and my bank set up to transfer at will & things have flowed VERY nicely over the few years I’ve done it.

    No complaints w/ Vanguard.

    The thing that REEEEEEEEEEEALLY kills me w/ Morgan Stanley is that I ***COULD*** even use Vanguard if I wanted, BUT……I’d still pay the MS fees on top of the Vanguard fees & MS just laughs all the way to the bank. Soooooooooo………..I just continue to use thier Portfolio Architect and try to enjoy being able to buy into millionaire’s funds w/ my pittance of money.


  23. Jonathan: How much would too small be to roll over into an IRA? Thanks for your input and for your great blog posts!

  24. Jonathan,

    It seems that you have choices of funds from several different companies. I had something similar at a previous job. What I was shocked to find out was there was a “wrapper fee” charged by the company administering the 401k. There was no mention of this fee in any of the 401k documentation. The wrapper fee was 0.75% in addition to the published expense fees for each fund. My HR department at the time was unaware of the fee. This fee was deducted in two different ways. For a while the percentage was taken from my contribution before shares were purchased. I noticed the problem because the total dollars invested did not add up to what was taken from my paycheck. The other (more sneaky way) was the transaction price per share was adjusted to be higher than the market price on the date of purchase. The difference between the market price and the transaction price was kept by the company as their fee. To find this I had to do historical price searches on the correct ticker symbolys for the mutual funds. I was shocked that it was legal to do this withut information in the 401k documentation.

    If you have these wrapper fees there is not much you can do about them. However it is good to know they are there so you can evaluate how your investments are actually doing. Also you can try to educate people in the company to convince them to move to a bigger company for 401k administrate that does not have wrapper fees.

  25. “How much would too small be to roll over into an IRA?”

    It really just depends on each situation. For me, it would just be too small if there was nothing I could not buy without incurring fees or meeting the minimum initial investment for a mutual fund.

    For example, at $900 you probably can’t buy most mutual funds, and if you buy a stock or ETF the commission would probably also hurt. It might even be hard to find a broker to open an account at.

    But if you roll over into another 401k, you might sidestep some of those issues.

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