Hi Jeremy,
Thanks for creating this awesome community! I’ve been glancing at my 401k after reading your posts. I’m currently contributing to a target retirement fund (80% for 2050 and 20% 2040), but it appears the expense ratio is higher than other available options. Do you recommend I move all funds into the SP500 option since it has the lowest expense ratio? I’d like to optimize as much as possible.
I’ve provided a screen shot of my available options. Thank you in advance!
Those are awesome investment options! When I see a list like that I know someone at the company who set up the 401k had the employee’s best interest in mind. So good job to your company’s leadership!
That said, you have the best available option: A target date index fund! I’d put 100% in a single target date index fund. Spreading it out doesn’t buy you anything. i.e. a 2050 and 2040 have the same stuff so now you’re just mixing more of the same stuff with the same stuff.
I’d choose the year based on your birth year +65. I like to round up to the next available year to stay a little more aggressive for a little longer.
Regarding the expense ratios, all those expense ratios fall into the category of “very low”. So low, that it doesn’t really matter. The reason the S&P 500 is a little cheaper is because it’s a little simpler. It just has 500 US stocks. The target date fund likely has many thousands of US stocks, international stocks and bonds. Just the nature of running that fund is slightly more expensive than the very simple S&P 500. But broad strokes, I believe the diversity is well worth the tiny difference in fees.
Here’s a video on S&P 500 vs TDIF:
What do you consider a “low” expense ratio? I have an expense ratio of 0.43% in my target date index fund in my 401K election. Should I focus on recreating a mix of total stocks, international stocks, and bonds with a lower expense ratio?
For a 401(k) I would put that in the “good but not great” range. Probably good enough that I’d leave it alone as monkeying with individual funds opens you up to more human error that could hurt more than 0.43%. But if you do have individual index funds offered that have expense ratios < 0.1% or so, I wouldn’t blame you for going all in on those.
It kinda depends on the situation. In an “ideal” investing situation, like an American brokerage account, I would generally never invest in anything with over a 0.2% expense ratio.
But investing not in the US can carry higher fees and transaction costs so that might not be viable. Also, when you have a 401k, you are given choices set by your employer which often are not optimal, so you just do the best you can.
In my “How to pick your 401(k) investments” post, I list these ranges:
