Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio?

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wizard903
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Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio?

Post by wizard903 »

My employer, the University of California, requires me to contribute 7% per paycheck into a tax-deferred 401(a) account, which they compensate with 8%. All of my voluntary contributions, in contrast, go into a Fidelity Roth IRA via maximum direct contribution and mega back door Roth conversion.

The fund list for the 401(a) account appears to be decent, but I'm relatively new to investing and thought I'd ask more experienced, informed investors for some feedback before making changes.

At present, I have approximately ~$40k in a target-date fund with a low ER (.02%) called "UC Pathway Fund 2045." Here (PDF warning) is all of the relevant information on the fund.

There are other options, however, that would enable me to approximate a Boglehead-style three-fund portfolio using the funds titled:
UC Domestic Equity Index Fund (PDF warning)
UC International Equity Fund (PDF warning)
UC Bond Fund (PDF warning)

Setting up Fidelity BrokerageLink for my 401(a) is another option.

My question is: What do y'all think of the target-date fund? Although it comprises low-cost index funds that (seemingly) tilt it towards small-cap value and emerging markets, I wonder whether ditching it for a more traditional Boglehead-style three-fund portfolio might make more sense, given my expected retirement date of 2050.

My target asset allocation across the 401(a) and Roth IRA, the latter of which exclusively holds equities, is 80/20. Thus, eventually I will increase the bond proportion of the 401(a) to keep my whole portfolio balanced near 80/20. For a few years, however, I will have equities in my 401(a) until the equities in my Roth IRA achieve 80% of the whole portfolio. At that point, my plan is to have the 401(a) consist entirely of one low-cost bond index fund and rebalance accordingly.

What do you think? Does the target-date fund seem decent enough? I'd appreciate any insight y'all have to offer.

Cheers
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FiveK
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by FiveK »

wizard903 wrote: Wed Sep 30, 2020 5:32 pm My question is: What do y'all think of the target-date fund?
Seems fine.

So would other choices you have available.

Might as well stay with the target-date fund, unless you prefer a different glide path on the asset allocation.
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zincTwo
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by zincTwo »

That is a great ER for a fund that has a good composition. I think it is a great choice by itself. It will keep you from tinkering in BrokerageLink. I personally use and love BrokerageLink, but I like this fund option for you.
yules
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by yules »

wizard903 wrote: Wed Sep 30, 2020 5:32 pm My employer, the University of California, requires me to contribute 7% per paycheck into a tax-deferred 401(a) account, which they compensate with 8%. All of my voluntary contributions, in contrast, go into a Fidelity Roth IRA via maximum direct contribution and mega back door Roth conversion.

The fund list for the 401(a) account appears to be decent, but I'm relatively new to investing and thought I'd ask more experienced, informed investors for some feedback before making changes.

At present, I have approximately ~$40k in a target-date fund with a low ER (.02%) called "UC Pathway Fund 2045." Here (PDF warning) is all of the relevant information on the fund.

There are other options, however, that would enable me to approximate a Boglehead-style three-fund portfolio using the funds titled:
UC Domestic Equity Index Fund (PDF warning)
UC International Equity Fund (PDF warning)
UC Bond Fund (PDF warning)

Setting up Fidelity BrokerageLink for my 401(a) is another option.

My question is: What do y'all think of the target-date fund? Although it comprises low-cost index funds that (seemingly) tilt it towards small-cap value and emerging markets, I wonder whether ditching it for a more traditional Boglehead-style three-fund portfolio might make more sense, given my expected retirement date of 2050.

My target asset allocation across the 401(a) and Roth IRA, the latter of which exclusively holds equities, is 80/20. Thus, eventually I will increase the bond proportion of the 401(a) to keep my whole portfolio balanced near 80/20. For a few years, however, I will have equities in my 401(a) until the equities in my Roth IRA achieve 80% of the whole portfolio. At that point, my plan is to have the 401(a) consist entirely of one low-cost bond index fund and rebalance accordingly.

What do you think? Does the target-date fund seem decent enough? I'd appreciate any insight y'all have to offer.

Cheers
The TDF looks good, and is a good choice if you don’t want the hassle of shifting your portfolio more conservative over time. But if you like that, or want more control, then obviously the 3-fund portfolio will be better for you!

Yules
lakpr
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by lakpr »

That, 0.02% ER, is an EXCELLENT expense ratio. For comparison, the Vanguard Target Retirement funds in regular IRA accounts charge 0.15%, seven times as much in fees. Even in retirement plans -- my own 401k plan offers them -- they are rarely seen less than 0.08% ER, again four times as much in fees. The fund composition also looks fine to me! Even if you adopt a three-fund portfolio, I doubt if you would do better than that ER.
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wizard903
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by wizard903 »

Might as well stay with the target-date fund...
I'm thinking so, too. Thanks for the feedback.
That is a great ER for a fund that has a good composition.
Happy to hear it. Thank you for chiming in.
The TDF looks good, and is a good choice if you don’t want the hassle of shifting your portfolio more conservative over time.
Thank you for the feedback. The fund seems worth keeping for a while, though I'll have to shift my asset allocation eventually since more than 90%, if not all, of my equities will end up being in the Roth IRA.
That, 0.02% ER, is an EXCELLENT expense ratio.
That's a helpful comparison; thank you.
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unclescrooge
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by unclescrooge »

That's a fiftieth of a percent. :shock:

If it was any cheaper they would have to pay you! :beer
mega317
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by mega317 »

I will have to look more closely. The last time I looked at the UC Pathway funds they did not tilt.

In general though UC funds are great, the envy of all the land, and you'll be fine with any decision you make.

If it helps you, it probably doesn't, I decided to use the brokerage link to buy Fidelity index funds for reasons I barely remember, something about only the largest 3000 and tobacco-free. But my IPS says to reevaluate that decision this year and I'm doing that. I might move to the UC funds during my next vacation.
wizard903 wrote: Wed Sep 30, 2020 5:32 pm All of my voluntary contributions, in contrast, go into a Fidelity Roth IRA via maximum direct contribution and mega back door Roth conversion.
Please make sure you understand how everything works because as you typed it here is not exactly right or at least incomplete. Or if it's complete then I need to ask why aren't you contributing any to tax-deferred accounts?
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wizard903
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by wizard903 »

Why aren't you contributing any to tax-deferred accounts?
Do you mean a 403(b) or 457(b), for example? Tax-deferred options are available to me but all of my voluntary contributions go to a Roth IRA (via a mega back door conversion) because I'd rather pay taxes now and have tax-free growth and tax-free withdrawals later, especially since: (1) my salary is likely to increase, albeit minimally, over time; and (2) no tax-deferred option would be sufficient for me to enter into a lower tax bracket.
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FiveK
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by FiveK »

wizard903 wrote: Wed Sep 30, 2020 11:24 pm
Why aren't you contributing any to tax-deferred accounts?
Do you mean a 403(b) or 457(b), for example? Tax-deferred options are available to me but all of my voluntary contributions go to a Roth IRA (via a mega back door conversion) because I'd rather pay taxes now and have tax-free growth and tax-free withdrawals later, especially since: (1) my salary is likely to increase, albeit minimally, over time; and (2) no tax-deferred option would be sufficient for me to enter into a lower tax bracket.
And the 401a itself is tax-deferred.

But if you have no pension, it might be worth your while to revisit the "all Roth (except for 401a)" strategy. That strategy might in fact be correct, but reasons (1) and (2) above won't be why.

See Traditional versus Roth for details, particularly the Common misconceptions and Estimating future marginal tax rate sections.
billfromct
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by billfromct »

I did not look at the detail for target date funds because my old tablet doesn't have the capacity to run the pdf files, but are you sure the expenses of the underlying funds aren't taken out of the underlying funds; then the .02% would be subtracted from the net asset value after the individual funds expenses are subtracted.

If the above were true, the net expense ratio would be much higher; maybe 4 or 5 times higher than the stated .02%.

I believe the expenses of the Vanguard target date funds include the underlying funds expenses, but I couldn't find that information in my casual search of the Vanguard website.

bill
Doctor Rhythm
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by Doctor Rhythm »

Another UC employee here, and I have around 85% of my 403b, 457, and DCP accounts invested in their "Pathway" funds. I've spent a lot of time looking at these funds and have watched them evolve over nearly two decades. Overall, I'd say they are good funds that will serve the vast majority of employees. However, they are a bit quirky in several ways which may or may not be important, and I'm a bit disenchanted of late.

First the good:
-- Exceptionally low expenses. My fund's ER was .04% last year, which I thought was outstanding, but then it dropped to .02% this year. That's the actual gross expense, not added on top of the expense of the underlying funds.
-- Broad market-weighted equity allocation (they do add a tiny bit of a small cap index on top of the core Russell 3000 fund)

And the somewhat odd or suboptimal:
-- It isn't as transparent as publicly traded funds. For example, it includes the "UC Commodity Fund" about which there is literally no information.
-- The bond allocation is somewhat riskier (longer duration, slightly lower credit quality) than some competitors, presumably due to inclusion of a "UC High-yield" fund and a "UC Long Duration" fund in addition to the core UC Bond fund. I say "presumably", because again there's no information available on these two funds either.
-- Management seems tempermental. There have been major changes in the allocation over the past 5-10 years. They used to be very conservative compared to peer funds, using close to an "age in bonds" allocation, but it's now fairly mainstream. At one point, they added REIT index fund, but got rid of it a few years later.
-- I don't know how often they rebalance or change allocation. For example, the 2035 fund had a 73% stock allocation at end of 2019. At the end of Q1 (post-pandemic), this had dropped to 67%. Then on June 30th, it was up to 75%. Makes me think that they didn't bother to rebalance during all the volatility, which is something I would have wanted if I'm turning over my portfolio to someone else.

Again, I don't know if any of these issues will have an adverse effect on returns, and as I said above, the funds are probably fine for the vast majority of employees. In fact, it's more my problem than theirs - I'm probably too picky and hands-on to be handing over management to a target date fund. I might leave the TDF and switch to the UC Domestic Equity (Russell 3000), UC International (Dev Market), UC Emerging Market, and UC Bond (aggregate bond) fund.
Last edited by Doctor Rhythm on Thu Oct 01, 2020 12:47 am, edited 1 time in total.
Topic Author
wizard903
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by wizard903 »

But if you have no pension, it might be worth your while to revisit the "all Roth (except for 401a)" strategy. That strategy might in fact be correct, but reasons (1) and (2) above won't be why.
Thank you. I'll read those sections extremely carefully because I have been operating on the second misconception that the article mentions: namely, "that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal."

I'll know in two years whether I'll have a pension (the preferred option) or have to continue with the 401(a) plan and its mandatory contributions. That said, would you mind elaborating on why the current strategy of putting all voluntary (mega back door) contributions, and also as much of the equity portion of my 80/20 portfolio as possible, in the Roth IRA might need to be revisited? I apologize if the answer is obvious but I don't intuit the relevant considerations.
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FiveK
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by FiveK »

wizard903 wrote: Thu Oct 01, 2020 12:46 am That said, would you mind elaborating on why the current strategy of putting all voluntary (mega back door) contributions, and also as much of the equity portion of my 80/20 portfolio as possible, in the Roth IRA might need to be revisited? I apologize if the answer is obvious but I don't intuit the relevant considerations.
It's an excellent question. The correct answer to the "traditional vs. Roth" contribution choice depends primarily on two things:
1) the marginal tax rate you could save on a traditional contribution now, vs.
2) the marginal tax rate you will pay when withdrawing amounts due to that contribution.

Item #1 can be calculated easily enough with tax software or even by hand. Item #2 requires some estimation/guesswork.

One very quick estimate one can do is the traditional balance one would need, assuming a 4%/yr withdrawal as the only income and 2020 tax law, to reach various federal brackets. E.g., the table below shows that $1.3 million is needed to reach the 22% bracket. If one has a pension, that changes the "withdrawal as the only income" assumption and lowers the amount needed in traditional accounts.

Take a look at your current, and best guess for withdrawal time, marginal tax rates: what do they suggest to you about this year's contribution?

One nice thing about the t vs. R choice: you can change it (at least) each year, so don't worry about getting it perfect in year #1. As years go by your guessing ability is likely to improve. :)

Code: Select all

Bracket	AGI		25X Amount
10.0%	$12,400 	$310,000 
12.0%	$22,275 	$556,875 
22.0%	$52,525 	$1,313,125 
24.0%	$97,925 	$2,448,125 
Topic Author
wizard903
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by wizard903 »

Doctor Rhythm, that's extremely detailed and helpful information for a fellow UC employee to provide, especially given your close monitoring over time. Thank you. I have also been frustrated by the lack of transparency in knowing what constitutes some of UC Pathways underlying funds, such as the "UC Commodity Fund," the "UC High-Yield Fund," and "UC Long Duration Fund."

Because the vast majority of my holdings will accord with the Boglehead-style three-fund portfolio, with Fidelity's Total Market (FSKAX) and Total International Funds (FTIHX) in my Roth IRA, I'll likely keep the target-date fund on hand for a while.

That said, what do you think of the core UC Bond Fund (PDF warning), if I may ask? It's (currently) my intention to use that as my fixed income holding to balance out the equities in my Roth IRA.
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wizard903
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by wizard903 »

One nice thing about the t vs. R choice: you can change it (at least) each year, so don't worry about getting it perfect in year #1. As years go by your guessing ability is likely to improve.
Thank goodness! :happy
And thank you, FiveK, for the extensive response. After closely reading the wiki article that you mentioned, I'll run the calculations that you suggested to compare the marginal tax rates.
mega317
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by mega317 »

wizard903 wrote: Thu Oct 01, 2020 10:15 am That said, what do you think of the core UC Bond Fund (PDF warning), if I may ask? It's (currently) my intention to use that as my fixed income holding to balance out the equities in my Roth IRA.
This is a perfectly good fund. As I said I haven't looked at the UC funds in a while. I seem to remember it used to be an actively managed fund with an objective to BEAT the Barclays Aggregate Index. (I'm sure a forum search of older posts could answer that.) But it looks now to be an index fund trying to track that index. It looks essentially identical to AGG, perhaps slightly lower credit quality, and the ER is pretty decent. I would have no hesitation to use it for the entire bond portion of my portfolio, assuming you want broad exposure that includes corporates.
Doctor Rhythm
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Re: Is my employer's 401(a) target-date fund (.02% ER) sensible, or would it be better to approximate a 3-fund portfolio

Post by Doctor Rhythm »

mega317 wrote: Thu Oct 01, 2020 10:59 am
wizard903 wrote: Thu Oct 01, 2020 10:15 am That said, what do you think of the core UC Bond Fund (PDF warning), if I may ask? It's (currently) my intention to use that as my fixed income holding to balance out the equities in my Roth IRA.
This is a perfectly good fund. As I said I haven't looked at the UC funds in a while. I seem to remember it used to be an actively managed fund with an objective to BEAT the Barclays Aggregate Index. (I'm sure a forum search of older posts could answer that.) But it looks now to be an index fund trying to track that index. It looks essentially identical to AGG, perhaps slightly lower credit quality, and the ER is pretty decent. I would have no hesitation to use it for the entire bond portion of my portfolio, assuming you want broad exposure that includes corporates.
The UC Bond Fund used to be a semi-actively managed fund that was intended not to deviate too far from the Bloomberg/Barclay aggregate. The website now says it's an index fund that tracks the aggregate, which is in line with what I had read was going to be the University's strategy. The NetBenefits site is still showing info from June 30, 2020, but usually updates quarterly, so we might have new information later this month. In any case, I think it's fine.
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