401k International Allocation Advice

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RyanJud76
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401k International Allocation Advice

Post by RyanJud76 »

I am re-evaluating my international allocation in my 401k. The following are the three funds available that are either international funds or have a large international exposure:

American Funds New Prospect R6 (RNPGX) (0.42%)
American Funds EuroPacific R6 (RERGX) (0.46%)
Invesco Oppenheimer Developed Markets R6 (ODVIX) (0.83%)

I am planning to shoot for 20% international exposure (FYI I have 80% US exposure in Vanguard S&P, Mid Cap, and Small Cap Index Funds). As you can see, I don't have any total international index funds (Vanguard, Schwab, Fidelity, etc) which I wish I had. Trying to determine the best mix of these three funds. I would like to have 25% or so of the international exposure in emerging markets. Looks like I may be able to achieve this by just having all 20% in RERGX since it looks like it's in about 20% EM right now. The 0.46% fee is much lower than the 0.83% fee for ODVIX. I know RNPGX isn't a true international fund and invests 58% in US and 42% in international currently, so I"m thinking I don't invest in this fund at all so I stay at my target 80% US allocation.

My other thought is to avoid having international in my 401k altogether and instead invest that portion in our Roth IRA's, where I currently have a 75% Schwab International Index Fund (SWISX) and 25% Schwab Emerging Markets ETF (SCHE) in my 20% international exposure. So my 401k would be 100% US funds and I would increase the international allocation in our Roth IRA's.

Let me know your thoughts. Thanks in advance!
lakpr
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Re: 401k International Allocation Advice

Post by lakpr »

Do you have any target retirement date funds in your 401k plan, and if you do what are their respective expense ratios?

In my 401k plan, for example, I have Vanguard Target Retirement series of funds for 0.10% each. We also know that these funds invest in a 60:40 ratio between US and international stocks I can choose a Target Retirement 2065 fund, contribute 50% to this and 50% to an S&P 500 index, and bingo I will have bought 20% of my portfolio in international equities at 0.10% ER than the 0.46% ER you have for RERGX.

Actually the 2065 fund also has 10% bonds and the true composition is 54% US, 36% International and 10% bonds, I would get 18% international not 20%, but I hope you get the idea. If you are set on exact 20% international equities proportion, just alter the ratio to 55% 2065 fund and 45% S&P 500 fund.

My 401k plan also offers ability to automatically rebalance -- with the maximum frequency of once a quarter -- between a set of investments in the proportion you desire. I hope your plan does too, and you can enroll. Thus you can be sure that even in the face of uneven market returns between the two funds, you are guaranteed to be 20% equities throughout.
Last edited by lakpr on Sun Jul 25, 2021 8:25 am, edited 1 time in total.
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retiredjg
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Re: 401k International Allocation Advice

Post by retiredjg »

I would not use any of those international funds if I had another account that I could hold a lower cost international fund in.
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RyanJud76
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Re: 401k International Allocation Advice

Post by RyanJud76 »

lakpr wrote: Sun Jul 25, 2021 8:20 am Do you have any target retirement date funds in your 401k plan, and if you do what are their respective expense ratios?

In my 401k plan, for example, I have Vanguard Target Retirement series of funds for 0.10% each. We also know that these funds invest in a 60:40 ratio between US and international stocks I can choose a Target Retirement 2065 fund, contribute 50% to this and 50% to an S&P 500 index, and bingo I will have bought 20% of my portfolio in international equities at 0.10% ER than the 0.46% ER you have for RERGX.

Actually the 2065 fund also has 10% bonds and the true composition is 54% US, 36% International and 10% bonds, I would get 18% international not 20%, but I hope you get the idea. If you are set on exact 20% international equities proportion, just alter the ratio to 55% 2065 fund and 45% S&P 500 fund.

My 401k plan also offers ability to automatically rebalance -- with the maximum frequency of once a quarter -- between a set of investments in the proportion you desire. I hope your plan does too, and you can enroll. Thus you can be sure that even in the face of uneven market returns between the two funds, you are guaranteed to be 20% equities throughout.
lakpr,

Thanks for the insight. My 401k does not have any target date fund options unfortunately. It does have an auto rebalance function that I already have set.
stan1
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Re: 401k International Allocation Advice

Post by stan1 »

RyanJud76 wrote: Sun Jul 25, 2021 7:39 am American Funds New Prospect R6 (RNPGX) (0.42%)
American Funds EuroPacific R6 (RERGX) (0.46%)
Invesco Oppenheimer Developed Markets R6 (ODVIX) (0.83%)
I would not use any of those due to high expense ratio and active management.
Are you sure there isn't an EAFE developed markets index fund available?
lakpr
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Re: 401k International Allocation Advice

Post by lakpr »

RyanJud76 wrote: Sun Jul 25, 2021 8:45 am lakpr,

Thanks for the insight. My 401k does not have any target date fund options unfortunately. It does have an auto rebalance function that I already have set.
What are the expense ratios for funds that are purely US equities? Are they in the 0.05% neighborhood, or 0.4% neighborhood?

If they are in the 0.4% neighborhood for US equities too, you can choose RNPGX instead of RERGX and apply the same idea as target date funds in my previous post. If they are in the 0.05% neighborhood, then in trying to decrease the cost of international equities you may be increasing the cost of US equities and may not be worth it.


never mind, I see full list below.

Switching your Roth IRA to international equities may be the simplest answer here.
Last edited by lakpr on Sun Jul 25, 2021 9:17 am, edited 2 times in total.
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RyanJud76
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Re: 401k International Allocation Advice

Post by RyanJud76 »

stan1 wrote: Sun Jul 25, 2021 8:49 am
RyanJud76 wrote: Sun Jul 25, 2021 7:39 am American Funds New Prospect R6 (RNPGX) (0.42%)
American Funds EuroPacific R6 (RERGX) (0.46%)
Invesco Oppenheimer Developed Markets R6 (ODVIX) (0.83%)
I would not use any of those due to high expense ratio and active management.
Are you sure there isn't an EAFE developed markets index fund available?
stan1,

No there is not another developed markets index fund available. Here is a list of all of my 401k choices:

Funds available in my 401k:
Standard Stable Asset A (XSAFA) (0.10%)
Vanguard Inflat Prot Sec Adm (VAIPX) (0.10%)
Dodge & Cox Income (DODIX) (0.42%)
Fidelity Advisor Strat Inc I (FSRIX) (0.72%)
Vanguard Balanced Index Adm (VBIAX) (0.07%)
Vanguard Value Index Adm (VVIAX) (0.05%)
Vanguard 500 Index Adm (VFIAX) (0.04%)
Vanguard US Growth Admiral (VWUAX) (0.28%)
Vanguard Mid Cap Val Idx Adm (VMVAX) (0.07%)
Vanguard Mid Cap Index Adm (VIMAX) (0.05%)
T.Rowe Price New Horizons I (PRJIX) (0.65%)
Vanguard MidCapGrwth Idx Adm (VMGMX) (0.07%)
Vanguard Sm Cap Val Idx Adm (VSIAX) (0.07%)
Vanguard Small Cap Index Adm (VSMAX) (0.05)
Vanguard Sm Cap Grth Idx Adm (VSGAX) (0.07)
American Funds New Prspct R6 (RNPGX) (0.42)
American Funds EuroPacifc R6 (RERGX) (0.46%)
Invesco Oppen Dev Mkts R6 (ODVIX) (0.83%)
Vanguard Utilities Index Adm (VUIAX) (0.10%)
camper95
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Re: 401k International Allocation Advice

Post by camper95 »

If you use RERGX as 20% of your portfolio and 80% as VFIAX, your overall portfolio ER is .12, hardly anything to balk at. If the rest of the funds are similar to VFIAX's that you've selected than it will be similar. One of the biggest factors in portfolio performance is fees, if your under .30 your fine, if you're under .20 you're golden.
stan1
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Re: 401k International Allocation Advice

Post by stan1 »

RyanJud76 wrote: Sun Jul 25, 2021 9:06 am
stan1 wrote: Sun Jul 25, 2021 8:49 am
RyanJud76 wrote: Sun Jul 25, 2021 7:39 am American Funds New Prospect R6 (RNPGX) (0.42%)
American Funds EuroPacific R6 (RERGX) (0.46%)
Invesco Oppenheimer Developed Markets R6 (ODVIX) (0.83%)
I would not use any of those due to high expense ratio and active management.
Are you sure there isn't an EAFE developed markets index fund available?
stan1,

No there is not another developed markets index fund available. Here is a list of all of my 401k choices:

Funds available in my 401k:
Standard Stable Asset A (XSAFA) (0.10%)
Vanguard Inflat Prot Sec Adm (VAIPX) (0.10%)
Dodge & Cox Income (DODIX) (0.42%)
Fidelity Advisor Strat Inc I (FSRIX) (0.72%)
Vanguard Balanced Index Adm (VBIAX) (0.07%)
Vanguard Value Index Adm (VVIAX) (0.05%)
Vanguard 500 Index Adm (VFIAX) (0.04%)
Vanguard US Growth Admiral (VWUAX) (0.28%)
Vanguard Mid Cap Val Idx Adm (VMVAX) (0.07%)
Vanguard Mid Cap Index Adm (VIMAX) (0.05%)
T.Rowe Price New Horizons I (PRJIX) (0.65%)
Vanguard MidCapGrwth Idx Adm (VMGMX) (0.07%)
Vanguard Sm Cap Val Idx Adm (VSIAX) (0.07%)
Vanguard Small Cap Index Adm (VSMAX) (0.05)
Vanguard Sm Cap Grth Idx Adm (VSGAX) (0.07)
American Funds New Prspct R6 (RNPGX) (0.42)
American Funds EuroPacifc R6 (RERGX) (0.46%)
Invesco Oppen Dev Mkts R6 (ODVIX) (0.83%)
Vanguard Utilities Index Adm (VUIAX) (0.10%)
That's an interesting list, the value guy or gal got their niche funds into the 401K plan, but you are correct there isn't a low cost ex US fund on the list. I'm also not seeing an indexed total bond fund with corporates which is also a little odd these days.

I'd consider using Total International Stock market in a taxable account or IRA. RERGX is very common in 401K plans and that's the one I'd pick if I had to keep international in the 401K.
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retired@50
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Re: 401k International Allocation Advice

Post by retired@50 »

RyanJud76 wrote: Sun Jul 25, 2021 7:39 am My other thought is to avoid having international in my 401k altogether and instead invest that portion in our Roth IRAs...

Let me know your thoughts. Thanks in advance!
I think your "other thought" is the answer.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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JoMoney
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Re: 401k International Allocation Advice

Post by JoMoney »

Something to keep in mind that may influence your allocation and location where you hold your international,
Know that distributions/dividends from international stocks typically have a foreign tax withholding before it ever gets to foreign security holder.
In the U.S. a fund will disclose the amounts of this foreign tax withholding to the owners somewhere, and depending on the owners tax situation they may be able to get a tax credit or deduction on their U.S. taxes for the amount of foreign taxes paid. If the international stocks/fund is held inside a retirement account they can't claim that credit, and may also owe U.S. income taxes on the investment when withdrawn.

Looking at the past 22 years of a broad international index fund like MSCI All-Country World Index excluding US, and looking at the difference between the "Gross Return" index (that is before any foreign tax withholding) and the "Net Return" index (that is after foreign tax withholding) you see the withholding amounted to just under .60% annualized.

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Add on top of that the additional transaction costs and expenses of a higher cost international fund and you could easily get over a 1% annualized drag on the investment. This drag compounded over years of investing can subtract quite a bit of the otherwise return, so take the costs into consideration seriously, weighed against whatever benefit you believe it offers.

Despite a lot of my agreement with Mr. Bogle that U.S. investors don't need an international allocation, and the claimed "diversification benefit" not doing what the proponents and portfolio theorists claimed it would it do, I've backed off on defending that position a bit. I'm a bit spooked with the frothy growth in the U.S. market and the monetary policy. I still think long-term U.S. investors will do just fine, and international stocks are not a safe-haven, but I wouldn't be surprised if sooner rather than later some sort of "reversion to the mean" starts to close the gap between relative US/ex.US performance that showed up the past decade.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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ruralavalon
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Re: 401k International Allocation Advice

Post by ruralavalon »

In your employer's 401k plan I suggest using just American Funds EuroPacific R6 (RERGX) (0.46%). The fund is diversified, covering both developed and emerging markets. Morningstar describes the expense ratio as "low", and the fund is about 31% emerging markets.

Although actively managed with a higher expense ratio the fund's performance has compared well (both better returns and lower volatility) to a total international stock index fund. Portfolio Visualizer, 1997-2021. I used the oldest share classes to get the longest period for comparison.
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RyanJud76
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Re: 401k International Allocation Advice

Post by RyanJud76 »

ruralavalon wrote: Sun Jul 25, 2021 9:56 am In your employer's 401k plan I suggest using just American Funds EuroPacific R6 (RERGX) (0.46%). The fund is diversified, covering both developed and emerging markets. Morningstar describes the expense ratio as "low", and the fund is about 31% emerging markets.

Although actively managed with a higher expense ratio the fund's performance has compared well (both better returns and lower volatility) to a total international stock index fund. Portfolio Visualizer, 1997-2021. I used the oldest share classes to get the longest period for comparison.
Thanks for sending. I was seeing the same thing that the EuroPacific fund has definitely done well in the past 10 years compared to international index funds. Definitely not an easy decision!
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RyanJud76
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Re: 401k International Allocation Advice

Post by RyanJud76 »

Thanks for all of the feedback. I really appreciate it. Seems like the opinions to stick with 100% American Funds EuroPacific fund in the 401k vs keeping 100% US funds in 401k and having a higher allocation in my Roth IRA in an index fund is pretty split. Not an easy decision, but I'm glad I got the feedback from you guys.
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RyanJud76
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Re: 401k International Allocation Advice

Post by RyanJud76 »

RyanJud76 wrote: Sun Jul 25, 2021 12:25 pm Thanks for all of the feedback. I really appreciate it. Seems like the opinions to stick with 100% American Funds EuroPacific fund in the 401k vs keeping 100% US funds in 401k and having a higher allocation in my Roth IRA in an index fund is pretty split. Not an easy decision, but I'm glad I got the feedback from you guys to ultimately decide what I want to do.
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retiredjg
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Re: 401k International Allocation Advice

Post by retiredjg »

RyanJud76 wrote: Sun Jul 25, 2021 12:25 pm Thanks for all of the feedback. I really appreciate it. Seems like the opinions to stick with 100% American Funds EuroPacific fund in the 401k vs keeping 100% US funds in 401k and having a higher allocation in my Roth IRA in an index fund is pretty split. Not an easy decision, but I'm glad I got the feedback from you guys.
Sometimes things split because it does not matter much which you pick. Rather than look at it as "not an easy decision", try to see it as "either decision is a good one".
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