Automatic Asset Rebalancing? 457 plan

Investing
#1

Hi Jeremy! I have a question regarding my 457 Plan which I have through Nationwide (that’s the company my employer works with). Within my 457 I have it invested in a Vanguard 2050 fund (VTRLX). I am 32 years old and have been working for local government the last 8 years. On my account, I just realized there is an option for “automatic asset rebalancing”. I don’t have auto rebalancing set up currently and I was leaning toward not setting that up, mainly because the description says, “easy and automatic way to reset your portfolio to original investment levels…saves you time and hassle on manually reallocating your current balance every few months”. I haven’t been doing anything manually to the account. The money just comes out of my paycheck and I let it sit there. Is automatic asset rebalancing something that I should consider? If so, could you provide me some info on what that means for the type of account I have?

Thank you!
Allison

#2

Hi Allison,
That is really cool that this is offered! From my understanding, this feature is for people who have multiple funds (like the 3 fund portfolio). In that case they would have to manually rebalance periodically but Nationwide has this feature that can do it automatically!
In your case though, you don’t need to use it because you have 100% allocated to VTRLX and the rebalancing is done WITHIN the fund already. That’s the beauty of target date index funds! :slight_smile:
Hope that makes sense!

#3

Makes sense; thank you so much!

#4

457 plans are like a Special Traditional IRA plan, because of one big difference… if you take your money out before 59 and 1/2, there is no penalty fee !! I hope you’re maxing out your contributions to this super IRA you have, those of us without access to them are jealous of those of you do have them LOL

I’m not a fan of TDFs, they underperform standard index funds and they cost more. The average expense ratio is .7% for a TDF, many regular index funds are at .04% or even lower, some are free.

#5

Haha well I’m glad to hear that having a 457 plan is something to be excited about.

I believe the fund I have it in is .09%, so not too bad.

I’m also considering setting up a Roth IRA or maybe a HSA but I haven’t done enough research yet.

1 Like
#6

One response to @hate2work’s critique of target date funds. That only applies to actively managed target date funds. Many providers offer target date INDEX funds which are simply a basket of low fee index funds.

They can be confusing to tell apart, but look for a low expense ratio (under 0.2%) and the word “index” in the description.

As an illustration, FFFHX is Fidelity’s 2050 actively managed target date fund with an expense ratio of 0.75%. Look at all the crazy stuff in there!

On the other hand, FIPFX is Fidelity’s 2050 target date index fund with an expense ratio of 0.12%. See how simple it is inside?!

I’m with Don on avoiding the high fee target date funds, but I love target date INDEX funds! :slight_smile:

#7

Hi Jeremy,

What are your thoughts on VTRLX? I don’t see “index” in the description when I search the fund.

Thanks!

#8

What are your thoughts on VTRLX?

It’s fantastic. Super low expense ratio (0.09%). If you look at the underlying funds inside, they’re all index funds. I think Vanguard should add the word index to the name.

#9

There are actually several reasons to avoid TDFs, I only mentioned two of them in my post.

By far the number one reason to avoid TDFs is that they underperform the market. Take this fund that Allison is in, VTRLX, it’s almost 11% cash and bonds. That’s way too much for someone 32 years old to have invested for her retirement fund. AND IT’S GOING TO GET WORSE as the fund ages and they start selling stocks from the fund to buy more bonds. Right now she’s only losing around the 11% compared to the market, as 2050 approaches that number will climb to as much as 40% cash and bonds !!!

Using Jeremy’s calculator, I plugged in some numbers for comparison. Using Allison’s starting and ending ages of 32 and 59, and using $1000 as the starting balance as well as the monthly contribution for both calculations, at 9% per year the ending balance is $1,353,864. Changing the percentage to 10%, the ending balance goes up to $1,611,629. That difference in the growth percentage approximates how much she’s losing by being in a TDF with 10% of her funds in cash and bonds. AND THAT DOESN’T EVEN TAKE INTO ACCOUNT ALL THE YEARS THAT THE FUND AGES AND IS AT 15% CASH AND BONDS AND THEN 20% CASH AND BONDS ETC, ALL THE WAY TO 40% CASH AND BONDS.

BTW, I’m using CAPS just for emphasis, I’m not shouting :grin:

Let’s look at the performance of some 2020 TDFs. Schwab SWYLX gained 30% during the past 5 years, Vanguard VTWNX gained 18% over the same period, and Fidelity FFFDX gained 14% during the same time period. In comparison, the SP 500 gained 79% during that same time. I’m guessing the performance difference between these funds is largely due to the expense ratios. But the difference in the performance between these funds and the SP 500 is clear.

Brokerages love TDFs because they make investing easy for the average bear, and they have attracted thousands of new customers because of that. Many people ( the majority? ) would rather be shown a one size fits all investment rather than do some research. In some 401s and such the investor might not have a choice except to use a TDF, but if given a choice, an obvious winner emerges.

#10

Hi Don,

Your critique of target date index funds potentially holding too conservative of an asset allocation is legitimate, but your comparison of past performance really isn’t fair or accurate for a few reasons.

  1. I don’t think your numbers are right. I think you may be ignoring dividends and looking only at share price? Dividends obviously benefit bonds much more than they do stocks. Over the last 5 years I show total growth as:
    • S&P 500: +129%
    • SWYNX: +49%
    • VTWNX: +58%
    • FFFDX: +65%
  2. You’re chasing past performance: The biggie is that you’re comparing a 100% large US stock portfolio to a blended portfolio of only 30% US stocks (the rest being international and bonds). The last five years have been GREAT for large US stocks, but using that as evidence that it will always be true going forward is not wise.
  3. You’re ignoring international stocks: Historically, (over periods of longer than five years) US and international have basically been flip flopping which one outperforms. Holding both long term increases returns and reduces volatility. Both good things in investing!
  4. You’re ignoring risk: When I talk to twenty-somethings they’re very interested in aggressive portfolio growth. But when I talk to people in their sixties and seventies, suddenly they don’t want to have 100% of the nest egg they spent a lifetime building all in large stocks of a single country. The S&P 500 has had several 50%+ drops in history. The 2020 funds you listed are designed for people who are around 65 years old right now. They’re generally much more willing to forgo maximum growth in exchange for capital preservation and income. I know we don’t think we’ll become our parents, but it can be hard to predict how you’ll feel about something decades in advance.
  5. You’re conflating actively managed TDFs with target date index funds. Fidelity’s 2020 target date index fund is FPIFX, not FFFDX.

While it’s a legit critique of target date index funds that they may have too conservative of an asset allocation (Although you won’t hear that when bonds/international are outperforming during a US economic downturn!) I personally don’t think going 100% large US stocks for your whole investing career is the right alternative. I think it’s likely to have too much volatility and result in bad human/emotional decision making like selling or switching to bonds at the wrong time. TDIFs take that decision making process away, which study after study shows actually benefits the individual investor :slight_smile:

#11

Jeremy, I’m not saying that older people should be 100% in stocks, heck no. I’m talking about the 20 somethings who, by any metric you want to use, are losing out on a LOT of money by using these TDFs instead of a 100% market fund. These young people have plenty of time to recover when the market dips, and if they’re dollar cost averaging, will do even better because they’ll be buying more at on the dips.

Anyone who thinks I’m off base with this should go to youtube and search “are target date funds a good long term investment?” and spend a little time watching

Congrats to any young person who is smart enough to invest for their future, and even using the TDFs are far better than doing nothing for sure. :+1: :+1:

#12

If you are talking about 20 somethings, why did you use 2020 target date funds in your comparison?

#13

To show the disparity between TDFs and the market.

I just don’t believe the answer for everyone, especially young investors, is to get into a TDF. If we have a 20% market downturn, the TDF holder isn’t going to sell, is he? No, he’s going to hold like the rest of us. So all the 10% bonds are doing for him is limiting his upside growth potential, that’s my point.