In an effort at radical transparency with you, our readers, we examine the lineup of mutual funds in our own workplace 401(k) plan. Are these good funds? How do you choose among them?
The goal is to give readers some tips on how to examine their own 401(k) plans, which — be honest — most of us just forget about until we leave the company.
A Vanguard representative began the session by explaining the difference between saving and investing. The former is fairly passive, as it involves putting your money in a savings account or your mattress. The latter involves putting your money to work. It is higher risk, but leads to higher returns over the long term.
Next, she discussed the importance of asset allocation, dividing your money among stocks, bonds, and cash, the last for emergencies and short-term goals. Bonds have been shown to limit losses in a market downturn.
She described how to use our Philadelphia Media Network retirement plan, which offers strictly Vanguard mutual funds. We can put money aside, pretax or after tax; and a portion of that is matched by our company. First tip: Put in enough to get the full match from your employer and enroll in automatic increases from your paycheck each year.
Philadelphia Media Network’s finance team determines the funds that we have in our 401(k) plan.
A full list of our fund options follows: For money market funds, we can invest in Vanguard Federal Money Market and Vanguard Retire Savings Trust III.
For bond funds: Dodge and Cox Income and Vanguard Total Bond Market Index Fund.
For equities: Vanguard Wellington Fund, Vanguard Explorer Fund, Vanguard Institutional Index Fund, Vanguard Mid-Cap Index Fund, Vanguard Morgan Growth Fund, Vanguard Small-Cap Index Fund, and Vanguard Windsor Fund.
For foreign equities: Vanguard International Growth and Vanguard Total International Stock Index Fund.
How does our fund menu stack up? Dan Wiener of Adviser Investments publishes a newsletter on Vanguard funds in which he highlights his picks and pans. He also invests almost exclusively in Vanguard funds for his clients, and gave us some advice.
"The best fund in the bunch is International Growth, but that’s only for foreign exposure. Otherwise, there’s not a single domestic equity fund I would buy other than MidCap Index. Vanguard Explorer and Morgan Growth are multi-managed messes (it’s split among too many managers). Morgan’s about to be sucked into U.S. Growth, which I assume will replace that option in your plan,” he said.
Wellington is “a terrific fund but you need to pair it with a strong growth fund. Where are the PRIMECAP managers? Not available" in our fund lineup. PRIMECAP is a large growth fund that Wiener likes because it is actively managed.
“If I were making a portfolio here, I’d base it on Wellington, allocating an amount that gave me the proper bond exposure [50 percent Wellington would be about 17 percent bonds], but then I’d want a good growth fund in my portfolio. I’d also put 10 percent to 20 percent into International Growth. So, how to make up that 30 percent for domestic stocks? Probably half MidCap Index and half Institutional Index,” he advised.
What I didn’t list? Our default is Vanguard Target Date Retirement Funds, which is an allocation of stocks and bonds based on age. Younger employees would be placed in by default (if they don’t choose otherwise) in the Target Date Retirement Fund with a faraway retirement date, say, 2060, and older employees would default a near-term Target Date Fund.
“As for target funds, in general they are good as a default, since most employees would probably otherwise go to cash. But targets are a simple solution for a complex problem, and they don’t solve it well. It’s like trying to use a Leatherman tool to fix your car. You might be able to do it, but it’s not going to work out well, and having specialized tools would help you do it a lot better and faster,” Wiener said.
“Take two people, same job category, same age, same salary. By Target Date Fund definition, they would both be in the same fund, But one person is unmarried, has a trust fund, and lives fairly frugally. The other is married, has kids, a mortgage and education loans. Should they both be investing for retirement in the same fashion? No.”
In general, he avoids Target Date retirement funds — so readers might want to consider that, too.
Finally, what should we add to our retirement plan?
Wiener, who prefers actively managed Vanguard funds over index funds, recommends that we add these options: Vanguard’s Capital Opportunity, PRIMECAP or Vanguard PRIMECAP Core, Vanguard Dividend Growth, Vanguard Health Care. and finally, Vanguard Global Equity.