My current 401k administrator is Merill Lynch. I have no choice in this matter - it's all that my employer offers.
It's website is poor. Customer service, not bad, but certainly not helpful. They cannot tell you, nor are they accustomed to telling people the expense ratios and other fees in their available mutual funds. The data is not available on-line for about 1/2 of their funds - especially the index funds. To discover that information you must call customer service and wait a few weeks for a paper prospectus.
The expense ratio (ER) for the s&p 500 mutual fund is 60 basis points (0.6%), which is ridiculous compared to Vanguard and Fidelity (300% to 750% more charged). The other index funds available charge even more - despite being passive.
Expense ratios for most of the other options are in and around 1% plus a little extra. Oddly the expense ratios seem consistent with the public ERs for funds listed in Morningstar (if the fund is listed anywhere - not all are listed).
So the challenge here is this:
I seek low cost (low ER) passively managed index funds. All of ML's index funds seem very high 0.6% or higher. Where do I put my money? In an expensive index fund or a life cycle fund composed of actively managed funds with an expense ratio of about 0.75%?
For the short term, I'm tempted to put most of my money into the T Rowe Price 2020 Life Cycle fund, which has a bond to stock ratio closer to my target 20/80 ratio. Unfortunately, it has a fairly low foreign stock weighting. I'll then put some additional money into the the Dodge and Cox International Stock fund with an ER of 0.7%. I'm also tempted to put some additional holdings into the hotchkiss & wiley small cap value fund, with an ER of about 1.04%.
The alternative would be to put my money into a few (3-5) investments that are the least worst (and not correlated) from the perspective of my entire portfolio - rather than attempt to have all the asset classes in which I am interested in investing. This requires a significant level of analysis that I will defer to my investment advisor on.
For the short term, to encourage consistency with most of my investments (which are in the Vanguard 2025 lifecycle fund VTTVX), I'll go with a life cycle fund and enhance it with two other mutual funds, which brings us back to the T Rowe Price 2020, Dodge & Cox International and Hotchkiss & Wiley small cap value.
My initial allocation will be:
60% T Rowe Price Target Retirement 2020 (TRRBX)
20% Dodge & Cox International (DODFX)
20% Hotchkiss & Wile small cap value (HWSIX)
I do regret not having any REIT or commodity options, however I'm sure ML's options would be actively managed versus passive indexes, anyway.
I also regret straying from passively managed funds - this is a fundamental issue, however, it seems that the actual expense ratios between active and passive alternatives are not far apart - which demonstrates how ML is screwing it's passive index investors. T Rowe's 2020 life cycle fund (TRRBX) does invest about 20% into an s&p 500 index, but it also favors growth stocks, which is an area I'd like to avoid.
I'll let my advisor know what I selected in the next few days. I think picking something is better than having the money sit in a low performance money market fund. Out of curiousity, I'm checking the automated investment advice system.
The automated investment advice is a bit flakey. I'm also nervous that ML will use the data to market to me. I find it extremely odd that it asks for the social security numbers of my spouse and children.
Their simulator seems to cap out 401k contributions at $15k. Too bad, since this year's limit is $15,500 and it should go up annually. There's also no place to specify my wife's employer match.
ML's plan tells us we have about an 85% likeliness of meeting our retirement goals of $135k annual income if we max out our 401k and save $24k outside of our retirement plans each year (which is our plan).
They recommend an asset allocation of 45% large cap, 28% small cap and 27% international. No fixed income, cash or other assets recommended. Seems like poor planning to me. Why no bonds - even a small amoutn to lessen volatility?
Oddly if we kept my retirement contributions in a 3.x% money market account would still have a 75% chance of meeting our retirement goals (they are factoring in our other investments).
Quite interesting - about 74% of the recommended funds were index funds. Too bad the ERs are so high. Here's what ML recommended:
20% large cap growth
25% s&p 500 index
6% small cap value (hotchkiss & wiley)
17% mid cap value
5% small cap index
3% global large cap
24% international index
I'm curious to see how the automated advice program will consider my 60/20/20 strategy. However, it will not provide advice until the asset reallocation I orderd is complete.
I'll follow-up next week to see what they say.
What would you do in this situation? How would you invest?
Have a great day, makingourway