401k strategy?

Question

Generally speaking, is it best to pick the cheapest and most reasonable fund in my 401k and then invest the rest of my portfolio in low-cost funds in a Roth IRA?

Answer 1

Yes, within this context: Many 401k's don't have a good selection of funds available. Often there are no index funds and the expense ratios are really high and there are loads and 12b-1 fees. And, there are hidden fees. Many people don't understand that 401k's can have terrible fees:

http://www.kiplinger.com/magazine/archiv...

So, the rule of thumb is usually to invest at least up to the employers match even if the funds are costly. But first, set up an asset allocation that matches your risk tolerance (http://www.saveyournestegg.com/diy.html teaches you how to do this) and then chose the cheapest and most reasonable funds that fit your asset allocation. (If, for example, your 401k has no international fund choice you could use your IRA/ROTH IRA for that fund.) If you have Vanguard funds you lucked out!

Then, put money in an IRA/Roth IRA - I suggest at Vanguard because they are client owned (no conflicts of interest) stayed out of the mutual fund scandals, have excellent funds and very low costs. Plus their customer service is rated very highly.

Watch out for taxes if you also use a taxable fund.

http://www.saveyournestegg.com/taxes.htm...

If you have expensive funds in your 401k you might want to give this to your plan administrator:

http://www.401khelpcenter.com/401k/uncov...

Added: Don't believe people that tell you that actively managed funds beat index funds. Most don't and no one knows which few will.

"Over longer time periods, indices continue to exceed a majority of active funds. Over the past three years (and five years), the S&P 500 has beaten 65.7% (72.2%) of large-cap funds, the S&P MidCap 400 has outperformed 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap

600 has outpaced 80.2% (77.7%) of small-cap funds."

Answer 2

If your plan offers "the 4 corners" of basic investments (indexes covering large cap, mid-small cap,and foreign stocks as well as bonds) at the usual low index cost, you may be fine as is- and the automatic investing will keep you on target as long as you rebalance annualy. The only big negative is that at retirement, that all gets taxed as normal income, which can take a big bite depending on how tax law and your situation goes at the time.

If you're willing to put a little more work into it, though, the Roth is a nice hedge, particularly if you put it in with dirt-cheap Vanguard(I've put my 401k and taxable investments into indexes, and used my Roth for Vanguard Wellington). I'd suggest putting whatever you need to get matching funds into your 401k, get the Roth, and if you can be sure you'll still be able to save more for investments, increase your 401k.

Answer 3

" Cheapest" this...and " low-cost" that.... doesn't seem like the absolute best way to go about taking care of your future !!

...as a matter of fact, depending on your age,  you should have at least the ROTH portion of your portfolio invested in one or two " actively managed" mutual funds... in sectors that ARE MAKING MONEY... roll up a balance in THAT account, the one that will be gaining for years and years.

Yayzooo Christee...pay the 1.3% or so to get some returns in the high teens/low twenties....that's why you pay a manager, a staff, etc...to pick and choose...to get you the best ...in the field/sector you've chosen

...the idea is to make, in three, four, or five years what a " low- cost " index would make in TEN or FIFTEEN !!

...otherwise, you've got the right idea...get BOTH forms of income in the future...taxed from the 401, and TAX-FREE from the ROTH.

Answer 4

I've got to agree with one answer that said : don't focus so much on cost or fees...concern yourself more with WHAT you are invested in...and DO get the benefits of a managed fund...for example, I hold some FNARX..( Fidelity's nat resources/ mostly energy ) ... sometimes the fund is heavy in " big oil", sometimes they sell that off and focus more in nat gas, or maybe the " drillers and service areas"...or move out of those into refining companies... at any rate, working, working, working to get the big bang for my bucks ...( about 37% last 14 months or so )

...and that is what you can use to get a ROTH cooking ...and settle for 8% gains as you get older...BUT 8% of a much bigger boodle. Comprenez?

Answer 5

If you have no clue, pick a target date fund somewhere around or after planned retirement (some become too conservative too soon).  If you are willing to put in some effort, compare short and long term returns of other funds and try to pick a mix (diversify) that do not follow each other through every peak and valley.  Just be aware that more or less than 80 of funds do not match the nearest related index, so you need to look for the 10 or 20% that average better.

Although, expense ratio is a consideration, it should not be the only consideration.  If two funds perform similarly the one with the lower expense makes sense.  But if one fund with 0.31% expense ratio is -6.5 % YTD and has averaged 7.25% 5 yrs and 3.84% for 10 yrs, and another with 1.46% expense ratio is -4.4% YTD and has averaged 20.84% for 5 yrs and 13.36% for 10 yrs after expenses, which would you be inclined to invest more in for the next 20 or 30 years.  History is no guaranty of future results, and these 2 funds are in different sectors.  But it can give you an idea how various funds got through similar periods.