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The 401k is a fantastic retirement investment vehicle. More times than not, you’ll also get a match from your employer which is “free” money provided as part of the benefits package. One major drawback is that you are strictly limited to the investment options provided within your employer’s plan (while you’re employed by them at least).
I’m fortunate that among the provided offerings are some standard Vanguard mutual funds, though that is just a recent development within the last 2 years. Even with the Vanguard Institutional funds available, the average expense ratio is still 0.54% which means there are definitely costly funds scattered in the mix. Here are the options currently available to me, through my employer’s 401k plan with Merrill Lynch:
|Ticker||Category Group||Category Name||Expense Ratio|
|AVFIX||U.S. Equity||Small Value||0.82%|
|REREX||International Equity||Foreign Large Growth||0.85%|
|JVLIX||U.S. Equity||Large Value||0.81%|
|MLAIX||U.S. Equity||Large Growth||0.72%|
|MVCJX||U.S. Equity||Mid-Cap Value||0.93%|
|OIGYX||International Equity||Foreign Large Growth||0.89%|
|PJSQX||U.S. Equity||Small Growth||0.69%|
|VINIX||U.S. Equity||Large Blend||0.04%|
|VIMAX||U.S. Equity||Mid-Cap Blend||0.08%|
|VSMAX||U.S. Equity||Small Blend||0.08%|
|VTSNX||International Equity||Foreign Large Blend||0.10%|
|MGOYX||U.S. Equity||Mid-Cap Growth||1.06%|
|NERNX||Taxable Bond||Intermediate-Term Bond||0.40%|
|VBTLX||Taxable Bond||Intermediate-Term Bond||0.06%|
When I started working, I was auto-enrolled in a “Goal Manager” plan. These models use simple to understand risk categories as titles for someone with zero clue what to do. Each new employee is auto-enrolled in the Moderate Goal Manager model which is basically a standard 60/40 stock/bond allocation.
|GoalManager Model||Stocks||Bonds||Money Market|
|Moderate to Aggressive Model||79%||21%||0%|
|Conservative to Moderate Model||42%||44%||14%|
…except the fund choices of these automatic allocation plans aren’t exactly the cheapest (or passive). For example, all bond holdings are the Loomis Sayles Core Plus Bond N (NERNX) mutual fund which is a full 0.34% more costly than Vanguard Total Bond Market Index Adm (VBTLX) total bond market mutual fund. I won’t get into the nuances of the differences between NERNX and VBTLX, but I’m content sticking with the cheapest passive investment option for bonds which is VBTLX in this case.
With the Aggressive Goal Manager model, the total expense ratio for the eight-fund automatic portfolio is 0.27%. However, I can achieve a three-fund alternative for just 0.059%. If I want to further slice into mid and small blend funds, I can do so with a five-fund alternative for just 0.064%. On a $100k balance, that difference is over $200 per year in savings.
If your 401k currently has you in an automatic portfolio like mine did, take a look at AFK Joe: 401k expense ratio minimization worksheet. It’s worth a few minutes to input information about your plan’s offerings and whatever your current automatic portfolio looks like to see how much cheaper you could manually build the same portfolio. Here is what mine currently looks like versus the automatic portfolio they would otherwise have me in:
With that, I’ll leave you with a little Last Week Tonight with John Oliver: Retirement Plans (HBO)