Reader Scott experienced some changes to his 401k set up and is considering a couple of choices. Here’s what he had to say:
My question concerns my 401k account through work. We have been fully invested with Vanguard funds; however, we have recently been forced to transfer all our funds to T D Ameritrade brokerage since Vanguard is no longer supporting small company 401k accounts at its brokerage.
This all fine except that after the first year at Ameritrade all the Vanguard funds will incur a transaction fee to trade in or out of. This will be unacceptable in my opinion so I need to change something.
I have researched correlated NTF funds to replace the Vanguard offerings with, but they carry higher expense ratios, usually .50 to 1.00 higher than the Vanguard fund.
Do you think I would be better off to switch to an all ETF portfolio and incur the commission for each trade up front, or go with the NTF funds with the higher expenses?
You are actually very fortunate to have that choice. Many 401ks do not offer ETFs at all leaving the participants stuck with mutual funds and their (at times) severe trading restrictions.
Personally, I would go with the ETF set up; no questions about it. Trading costs are negligible these days, especially if your investment horizon is long term and you don’t engage in day trading.
It’ll also make it easier to follow my trend tracking approach, if you’re so inclined, along with the use of trailing sell stops. My weekly StatSheet will provide you with the backup information to hopefully assist you in making more successful investment selections.
Comments 4
Ulli,
Regarding the person's 401k. I have found that ever since VXF, an ETF replicating the Extended Market Index, is the best I could find in most cases and stay quite diversified. As I understand it is basically the Wilshire 5000 index minus the S&P; 500 index. It works great during up trending markets and falls hard during down trending markets. I sell it when I get a sell signal either from Ulli or from any really good trend timing service that I may be using.
Linda
Ulli
Thanks for posting my question on the blog. I have been also leaning towards the all ETF idea as you suggest. I am going to continue research for suitabe core funds to get started, and then add some more speculative funds to try and juice up my returns.
I would appreciate any favorite funds you or you readers might suggest(thanks Linda),to help me build a new portfolio.
If you are investing a percent of your pay each month, the commission costs need to be considered. If you only invest $ 100 per month and pay $10 commission, that is a high percent. If you invest $3000 per month a $ 10 fee is not significant.
In a 401K, if the employer buys in large lots and the employee only pays his proportionate part, then the ETFs would be the best way to go.
But if you buy small amounts and would pay the commissions with no reduction, then the mutual fund might be more cost-effective.
My 457 plan added a 2% fee on any fund not held at least 32 days. Other than that, it is an excellent plan with rock bottom expense rations and choices of an S&P; 500 fund, an international fund, a mid cap fund, a small cap fund, a bond fund, and a stable income fund that pays around 4%. These are all stand alone funds managed by multiple advisors, usually with a growth advisor and a value advisor, so the mid cap, int'l, and small cap are pretty much like index funds.
Any idea how to deal with the 2% short term trading fee?