401K Question - S&P 500 Index vs. Target Date Funds

1) You are not dumb

2) You are not missing something

3) 100% in S&P 500 index fund is a fine choice for most people

Target Date means as you get closer to retirement, more of your money will be invested in more stable investments like bonds. 100% S&P is fine for now, but if you lose 30% at retirement will that be ok? It's really a risk you will have to decide for yourself. The upside of 100% S&P is that if you never hit a crash, you will have more money than you would have with the Target fund.

When you get to mid 50s, start considering target funds. At least look at them for guidance on how they diversify assets as people get older.

S&P is fine for now. Pour the money in and let it ride.

Real Obvi wrote:

1) You are not dumb

2) You are not missing something

3) 100% in S&P 500 index fund is a fine choice for most people

If you are getting very close to retiring and will need the money soon, certainly stocks have more risk than bonds. But it is hard to get excited about investing in bonds (which you will get in most Target Date investments) these days if you ask me.

Nothing wrong with 100% S&P, especially if you're a younger investor (e.g. <35). Target date funds are also a potentially good option but within 401K plans you need to watch out for high fees among target date funds. They are often the default option and a lot of it has to do with the provider trying to steer investors to the high fee funds.

You obviously want to be aggressive when you're young and have lots of years to weather the turbulence. That makes the S&P a good option, but a good low cost target date fund scheduled several decades out (e.g. 2055) will also be aggressive.

One potential downside to being 100% S&P is the lack of international equity exposure. It all depends on your philosophy though, some like to avoid international for various reasons, including the fact that they have underperformed relative to the U.S. for a long time. I personally like to be 35% invested in international.

1. That'd be dumb if you were within 10 years of retirement

2. Just because usa markets have out performed international in the past, doesn't mean the USA will always be #1

If the target date fund is through Vanguard, the fees will be higher than a S&P 500 fund, but not much higher.

Here's the other weird part. It's through John Hancock (had never heard of them). All of the target date funds, along with a bunch of other options, are all vanguard products. However, the S&P 500 index I chose, which was the only thing that really resembled a broad market index fund, was a John Hancock specific product. It was all rather confusing and rushed.

Actually I just checked and there are also some Fidelity products in there. Super weird. I originally wanted to just dump it all into something like VTI but they don't offer VTI. Anyone else experience this?

Just understand the meaning of SP500 and bond funds. The target dates just shift allocation to more bonds over time. It’s supposed to be less risky even though it’s actually not less risky to buy bond funds instead of stocks. You should do your own research and understand the meaning of where you are putting your wealth

lazy orman wrote:

If the target date fund is through Vanguard, the fees will be higher than a S&P 500 fund, but not much higher.

I agree that Vanguard target date funds in an IRA will be minimal, but if the 401K provider is an insurance company or bank for example, they can still jack up the fees. I've seen this many times. You have to look at your 401k participant disclosure to see the true amount of fees. Just looking at the snapshot of the Vanguard fund will not have them listed. Often they are in the form of "Administrative fee"

"I was going to sign up for my company's 401K, but I don't know if I can run that far." - Bobby Lee on NML.

For example, Vanguard target 2035 fund has five components Vanguard Total Stock Market Index Fund 43.6% Vanguard Total International Stock Index Fund 29.6% Vanguard Total Bond Market II Index Fund 18.5% Vanguard Total International Bond Index Fund 8% Vanguard Total International Bond II Index Fund 0.3% There may be particular categories of fund shares that I did not copy over. The different target dates have different mixes of the funds. The fund administrator rebalances and evolves the fund mix based on performance and time horizon.

My 401k is a vanguard target fund. Not a fan of so much international but it is a set it & fidget it.

My Roth & Taxable I have direct access to with Vanguard and am all VTI. God willing I live til retirement that’s 20-30 years away so I’m not worried about ups and downs right now as I’m in the accumulation phase right now.

One thing to look at as a you d investor is the fees. Be sure to go with a no or low cost fund.

Good advice so far, and a couple of thoughts.

Learn the parameters of your 401 K program. That is your money and you need to be in control of it, and that means not being rushed and having access to the answers to your questions.

Call them as often as you need to.

with that in mind, a few questions you could ask:

1) May I invest in more than one fund? For expample, since you are hesitant, maybe invest half in the SNP 500 and half in the target date fund.

2) How often can I make changes to my fund selection? Once per year? Once per quarter? Is their a charge for doing so?

3) Is there a minimum holding period? Some funds will charge a redemption fee on shares held less than a prescribed amount, commonly 3 months or so.

4) List all the applicable fees. Sometimes the fund has a fee but the 401K administrator has a fee on top of that.

5) Understand the sequence and rebalancing inherent in the target date fund and make sure you are comfortable with that ratio of allocation.

6) Understand the max. you cana contribute each year.

There's probably more, but that is off the top of my head.

Thread has me thinking about my own retirement/savings. Quick question: if I make over $150k salary is it a fact that I cannot open a Roth IRA as supplemental to my 401k?

Target date funds will give you a more diversified portfolio than just the SP500.

The SP500 is dominated by a handful of giant tech firms. That's been good lately, but 5 yrs from now? 10 yrs from now?

Maybe you don't want your wealth lashed to just 4-5 gigantic companies.

a target date will own more - small caps, mid caps, emerging, europe, australia etc. Spreads your bets around.

and if you are in your 20s or 30s the bond portion is almost negligible.

so I'd go with the target date funds, although in the real world you would likely do similar with both. I just get nervous being too concentrated in US giant mega-tech companies so I prefer target date.

another answer is that legal departments love target date funds because they are immediately provable to be prudent investments for everyone. So companies can't get sued. So companies push target date investments. While owning the SP500 alone can be imprudent, so if the market tanks owners of that fund might sue the company providign the 401k.

That's a good point I hadn't thought about. I don't care if the market goes up or down. If the market dips I'm just buying stocks on sale. (I'm in my 20s, I understand being worried if you're in your 60s).

For normies I imagine there is a correlation between market downturns and people pulling money out of their 401k. I suppose the target date funds would help prevent that behavior a little bit?

Tegan wrote:

Thread has me thinking about my own retirement/savings. Quick question: if I make over $150k salary is it a fact that I cannot open a Roth IRA as supplemental to my 401k?

What is your filing status for tax purposes? And if you are married filling jointly, what is yours spouse's income?