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Author: CPAScott Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Confirm decision Date: 11/20/2003 5:57 PM
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Hi all ... based on some advice on another board, I was considering rolling over money in a former employer's 401(k) plan to Vanguard, where I'd have more diversity, better performing index funds (alphas are better at Vanguard). Vanguard is where my Roth IRA is.

The problem is in maintenance and custodial fees. I pay only the expense ratios in the 401(k), the funds are no-load, reasonably low expense ratio funds.

Here's my total retirement picture:

Fund Name Ticker Expenses Holdings %
.
In my former employer's 401(k) plan:
All funds are managed by State Street Global Advisors
.
Daily Bond Market Fund (n/a) .10 $ 1,600 9.3
S&P 500 Index Fund SVSPX .04 $ 7,600 44.4
S&P MidCap Index Fund (n/a) .04 $ 500 2.9
Russell 2000 Index Fund (n/a) .06 $ 4,000 23.4
State Street Corp. ESOP Fund SSC -0- $ 900 5.3
.
In a Roth IRA:
Vanguard Balanced Index Fund VBINX .16 $ 2,500 14.6
.
Total $17,100 100.0

Obviously, the expenses of the 401(k) plan are LOW, due mostly to the self-management of the accounts. I thought I might open a Rollover IRA at Vanguard with the following funds:

S&P 500 Index Fund - 55% ($8,030 contribution)
Small Cap Index Fund - 30% ($4,380 contribution)
REIT Index Fund - 15% ($2,190 contribution)

The problem is that under Vanguard's fee structure, both the Small Cap Index Fund and the REIT Index fund would be charged a $10/year maintenance fee, and all three funds would be charged a $2.50/quarter custodian fee. That's $50/year PLUS higher expense ratios.

So, despite the advantages of a Rollover IRA over a 401(k), I'm inclined to stay put.

What do you think?


CPAScott
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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37906 of 76237
Subject: Re: Confirm decision Date: 11/20/2003 6:09 PM
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This is why I chose Scottrade over Vanguard. There are no IRA account fees, free mutual fund trades, and low equity trades. Plus there is a branch less than a mile away. Put more of my money working for me.

Fuskie
Who is going to roll over his 401k soon too.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37907 of 76237
Subject: Re: Confirm decision Date: 11/20/2003 7:22 PM
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What do you think?

You might want to contact or search Vanguards website. Some places wave the fee if you set up automatic deposits or reach a certain minimum. Maybe consolidation to one fund is in order.

JLC


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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37908 of 76237
Subject: Re: Confirm decision Date: 11/20/2003 7:31 PM
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Obviously, the expenses of the 401(k) plan are LOW, due mostly to the self-management of the accounts.

I don't understand. Why are the expenses so low? The link below shows an expense ratio of 0.16% for the S&P 500 Index fund. Do you get a special deal through the 401(k) plan? If so, stick with the 401(k).
http://www.ssgafunds.com/fundsfac/pdf/svspx_sp500.pdf

By the way, for many Vanguard accounts, if you keep at least $10,000 in a single account, they waive the fees.

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Author: MissouriGup Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37911 of 76237
Subject: Re: Confirm decision Date: 11/20/2003 7:44 PM
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Open the Rollover IRA at Scottrade. I have mine there and there are no fees. You can buy the Vanguard funds for no charge.

Gup

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37923 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 12:24 AM
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>S&P 500 Index Fund - 55% ($8,030 contribution)
>Small Cap Index Fund - 30% ($4,380 contribution)
>REIT Index Fund - 15% ($2,190 contribution)

>The problem is that under Vanguard's fee structure, both the Small Cap
>Index Fund and the REIT Index fund would be charged a $10/year
>maintenance fee

There's no point in owning 2 funds, one S&P and 1 Small Cap, when you can simply buy the Total Stock Market Index fund, pushing the investment size over $10,000 and avoiding those fees.

>That's $50/year PLUS higher expense ratios.

Expense ratios are only one type of fund cost. Other fees, such as trading commissions paid, are not reflected in the ER.

In your case, for example, while the SSGA S&P 500 fund has a lower ER than Vanguard's S&P fund, Vanguard has outperformed it over 1,3,5, and 10 year periods.

Nick

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Author: CPAScott Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37926 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 9:21 AM
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don't understand. Why are the expenses so low? The link below shows an expense ratio of 0.16% for the S&P 500 Index fund. Do you get a special deal through the 401(k) plan? If so, stick with the 401(k).


Yes, my former employer was State Street, so the funds are their own ... they don't charge the internal plan as much as they charge other investors.

By the way, for many Vanguard accounts, if you keep at least $10,000 in a single account, they waive the fees.

Unfortunately, that's $10,000 in any FUND, not account. An IRA account with $18,000 in it divided equally into two funds (9K each) would be subject to fees for each fund.



CPAScott

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37928 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 9:51 AM
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There's no point in owning 2 funds, one S&P and 1 Small Cap, when you can simply buy the Total Stock Market Index fund, pushing the investment size over $10,000 and avoiding those fees.

Yes, there IS a point. If you own the Total Stock Market Index fund, roughly 80% of the capitalization will be made up of the S&P 500 (i.e. large caps). The remaining 20% would be divided up among the midcaps and small caps.

By owning 2 or more funds, you are able to more precisely control the weighting of large caps, mid caps, and small caps. If he wants to have a heavier weighting towards small caps, then he will want to invest in more than 1 fund.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37929 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 9:57 AM
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Unfortunately, that's $10,000 in any FUND, not account.

That's what I meant.

An IRA account with $18,000 in it divided equally into two funds (9K each) would be subject to fees for each fund.

1) I wouldn't get too hung up on diversifying that much.
2) You don't *have* to divide $18,000 equally. You could always do $11,000 and $7,000, which would at least avoid all the fees in one account and several of the fees in the other.

In any case, it sounds like you would be better off staying with State Street.

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37930 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 10:00 AM
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By owning 2 or more funds, you are able to more precisely control the weighting of large caps, mid caps, and small caps. If he wants to have a heavier weighting towards small caps, then he will want to invest in more than 1 fund.

This is precisely the reason I like the Extended Market Index Fund. It's everything except the S&P 500.

cliff

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37931 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 10:32 AM
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>>There's no point in owning 2 funds, one S&P and 1 Small Cap, when you can simply buy the Total Stock Market Index fund, pushing the investment size over $10,000 and avoiding those fees.

>Yes, there IS a point

I disagree. By buying funds instead of individual stocks, you're saying you can't outperform the market. By selecting index funds, you're saying no one else can either.

But now you're willing to pay extra fees because you've somehow discovered the 4000 small cap stocks in the total market fund are undervalued vs the large caps and you want to overweight?



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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37935 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 11:36 AM
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I disagree. By buying funds instead of individual stocks, you're saying you can't outperform the market.

No, I am not.

By selecting index funds, you're saying no one else can either.

I think you are confused about what it means to beat the market (as most people are). First of all, when academicians talk about the "market," they are referring to the market portfolio of all assets (whether you are talking about money market funds, bonds, stocks, real estate, commodities, or whatever). In theory, you cannot beat the market return after adjusting for risk. I may be able to earn higher returns than the market portfolio, but I would have to take on greater risk. That's the theory anyway.

Since it is not practical to own the market portfolio, many have used various equity index funds as proxies -- the S&P 500 and Wilshire 5000 (i.e. "Total Stock Market Index") are the most prevalent. However, you are only selecting a small portion of all assets.

If you *really* believe that you can't beat the market, then you should try to own assets in as near a proportion to the market portfolio as possible. This would mean that you would want to make sure that you also have REIT indices, bond indices, etc. (Actually, you would borrow or lend to adjust your level of risk while holding the market portfolio).

So why would you limit yourself to the Wilshire 5000 equity index? Obviously because you want a higher return than the market portfolio, and the Wilshire 5000 is a great way to get a higher return over the long run.

That being said, why would it be wrong to further focus your portfolio on small cap stocks? What criteria did you use to decide that the Wilshire 5000 is the proper asset focus for CPAScott?

MadCapitalist
Who has studied finance theory in detail and thinks it is a crock of $#%&!

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37939 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 1:39 PM
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Rex Sinquefield runs an advisory service which is just about all indexes. He is a confirmed "Efficient Market" adherent. But his mixtures do outperform, because he mixes in various asset classes, as MadCapitalist suggests.

http://www.ifa.com/Library/Support/Articles/Scholarly/TextInterviewRexSinquefield.htm

He isn't interested in managing anything less than $1 million, last I heard.

cliff



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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37940 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 1:59 PM
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There are frequently discussions/comments as to the general makeup of the Total Stock Market Index Fund (VTSMX). Morningstar's breakdown of the index is pretty thorough and worth posting again:

http://quicktake.morningstar.com/Fund/Portfolio.asp?Country=USA&Symbol=VTSMX&fdtab=portfolio

Roughly, they show a cap breakdown of 70% LargeCap, 20% MidCap, and 10% SmallCap.

FWIW,
Bill

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37948 of 76237
Subject: Re: Confirm decision Date: 11/21/2003 4:22 PM
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Roughly, they show a cap breakdown of 70% LargeCap, 20% MidCap, and 10% SmallCap.

Yeah, you will find a lot of different figures. Wilshire 5000 (the index it's based on) reports a breakdown of 86.5% large cap and 10.05% small cap. The breakdown will change depending on your definitions.

The market cap of the Wilshire 5000 was about $12.4 trillion dollars at the end of October, and the market cap of the S&P 500 was about $9.7 trillion at the end of October, so the S&P 500 made up about 78% of the market cap of the Wilshire 5000.

I just use the S&P 500 as a proxy for large caps, although *technically* it may be incorrect. If there is even a technical definition for large caps, I have never heard about it.

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