Help me with my 401K?

[jively]

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Dear jively,
[...]
I’m going to ask you a favor, and I will understand if you don’t answer, or if you don’t know the answer….

The question is in regard to the loads and 12b-1 fees that load mutual fund companies charge investors. For instance, America Funds generally charge a 5.75% (6.1% net) upfront load for Class A funds up to a $25,000 purchase. Eighty-six percent (86%) of this load fee is funneled back to the brokerage house that sold the fund to the individual. I was curious; in general, what percent of this money funneled back to the brokerage house is shared with the broker salesman (the account rep). If you know the answer, I would appreciate also knowing it.

Also America Funds did charge a yearly Class A fund 0.12% 12b-1 fee; now increased to a 0.23 or 0.24%. This fee is funneled back to the brokerage house. Again – I am curious what part of this fee is shared with the broker salesman (the so-call account executive). I would guess many 60% is given (earned by?) to the salesman. Do you know or have an opinion? I would appreciate it if you (or anybody else) gave me an estimate (just a ballpark estimate). I realize that most brokers don’t want to share stuff like this with the public.

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I'm sorry but I do not know the answer. I am a CFP (Certified Financial Planner) professional, and I work for a company that is a Registered Investment Advisor. I do not have any NASD licenses (Series 6, 7, etc.) so I can not earn commissions on any investment product. I am not a broker.

There is a lot of debate between investment advisors on fee-based vs. commission. There are plenty of stockbrokers that "churn" their client accounts, turning over their portfolios every year, alternating between A-shares, B-shares, ETFs, variable annuities: investment products that can have high loads or commissions.

My favorite advice is from Nick Murray, who is an advisor coach who writes for Financial Advisor Magazine. He says basically that the relationship between an advisor and a client has to be a long-term one, and that the advisor has to be fairly compensated. A-shares and B-shares do not correctly compensate an advisor to have a low-turnover, long-term relationship with a client.

C-shares, that charge 1% annually paid to the advior, do fairly compensate the advisor. 1% is roughly what a fee-based firm like mine charges based on assets managed. Both have no incentive to turn over the portfolio, so that a portfolio that is properly balanced and diversified may never need to be changed (besides rebalancing or changes of goals), and a tax efficient long-term relationship can flourish with excellent long-term investment returns.

-Tom

[afs]

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Ok, my recommendation was not simple. However, I thought there was a lot of general info that many people could use. Plus, it's more of a "teach you to fish" instead of "give you a fish." Maybe the thread could go in some kind of FAQ on how to allocate one's 401(k).

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Halfway authoritive answers to this question would be veryvery nice. I'm in a similar position to the OP (albeit w/ a far inferior plan), and really do not know what to do. At the moment I have 100% in an s&p 500 index fund ... I suspect this is not at all optimal. (I won't retire for 40 years or so; can handle a decent bit of risk.)

[Sniper]

afs, take a look at OP and provide more detail on your situation, if you are looking for more specific guidelines for your particular situation.

The general analysis provided by jively in this thread, is an excellent start for anyone looking for guidance to do their own research (as you should), when following a passive indexing plan.

[buffett]

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At the moment I have 100% in an s&p 500 index fund ... I suspect this is not at all optimal.

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Not that I'm the greatest investor ever, but this is exactly what I did when I was in a 401(k), so I for one don't think it's a terrible idea.

[afs]

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afs, take a look at OP and provide more detail on your situation, if you are looking for more specific guidelines for your particular situation.

The general analysis provided by jively in this thread, is an excellent start for anyone looking for guidance to do their own research (as you should), when following a passive indexing plan.

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For the record, I just realized that the 'halfway authoritative' statement might sound like a dismissal of advice people (mainly jively) posted -- it wasn't meant this way at all. Quite the opposite, honestly. Just wanted to make that clear.

In any case, to respond:

I'm 25 years old, & only recently started making a decent salary [Edited by request] After finally eliminating my debt, I enrolled in my employer's retirement plan at the beginning of the year. My office is only ~30 people, so their plan is nothing like Humphrey's -- a SARSEP plan, no matching monies from employer, rules are essentially (afaik) equivilent to a 401k. At the moment I'm putting in 8%; once I'm at the magic '3 months salary in the bank' point, I'll put in the maximum 15%. The plan is through AXA and offers about 75 funds, most w/ absurdly high fees. I don't have a wife, dependants, or a martgage (and before someone says I'd be better off w/ the later -- I live in NYC, and even if it's a good investment, I really don't want to spend 300k to live in a dump in south jamaica.) I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

I'm sure that jively's advice is very good -- the problem is, I'm very ignorant & simply don't understand the concepts behind the advice. (Which is ironic & humbling/humiliating, given that most of the work I've been doing lately is development on pre & post trade analysis software for an algorithmic trading suite.) So maybe this is just another request for a basic retirement planning book.

Really, I have 2 (big) questions -- what sort of distribution of funds makes sense for someone in my spot? (Which despite maaaany cosmetic differences is not that far off from Humphrey's, I'd think.) ... And then, what sort of criteria do you use to pick individual funds for each 'role' in the collection? ... With my extremely slight knowledge, I'd take 3 index funds, one s&p 500, one large cap foreign markets, and one emerging markets ... if there even _is_ such a thing as an index for the later two -- see how little I know? ... Not enough to justify an opinion there, certainly. In any case, none of the funds offered by my plan match the description of the last two.

[Carl_William]

Jively,

Thanks for the reply. Excuse my time delay in thanking you. I understand what you are saying, and it's seems fair to me.

I think some people can handle their own financial accounts, but then there are many others who can benefit from a good long term financial consultant. But....

Basically I'm against mutual funds with 12b-1 fees and financial intermediaries "brokers" who sell them. There is no benefit to the investor from 12b-1 fees -- it's just a yearly drain on their account.

[jively]

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I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

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Ok, so this sounds like you are OK with Portfolio A, 100% stocks, so I would recommend this asset allocation:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

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The plan is through AXA and offers about 75 funds, most w/ absurdly high fees.

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Ok, so you need to get the list of the 75 funds, and try to figure out which asset class each fund is for. Plus, you can use the criteria I mentioned in this post as to which funds to use. Any fund that says "Index" is going to be a winner. Funds that say "Small Cap Value" in the fund name generally are Small Cap Value. [img]/images/graemlins/wink.gif[/img] (So you can get a lot of information just from the fund name.)

AXA's web site for your plan probably has links to Prospectuses or Fund Info sheets that should say which asset class they are. Don't be surprised in 40 of the 75 funds are Large Cap Growth Funds. Don't pick any of those.

The stuff about "deepest value" is a little advanced...so you can skip it. If you just pick funds with the right asset classes, and use the allocation above, you should do very well. Most large cap value funds, for example, have similar returns over long periods of time.

Good luck,

-Tom

[z28dreams]

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I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

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Ok, so this sounds like you are OK with Portfolio A, 100% stocks, so I would recommend this asset allocation:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

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The plan is through AXA and offers about 75 funds, most w/ absurdly high fees.

[/ QUOTE ]
Ok, so you need to get the list of the 75 funds, and try to figure out which asset class each fund is for. Plus, you can use the criteria I mentioned in this post as to which funds to use. Any fund that says "Index" is going to be a winner. Funds that say "Small Cap Value" in the fund name generally are Small Cap Value. [img]/images/graemlins/wink.gif[/img] (So you can get a lot of information just from the fund name.)

AXA's web site for your plan probably has links to Prospectuses or Fund Info sheets that should say which asset class they are. Don't be surprised in 40 of the 75 funds are Large Cap Growth Funds. Don't pick any of those.

The stuff about "deepest value" is a little advanced...so you can skip it. If you just pick funds with the right asset classes, and use the allocation above, you should do very well. Most large cap value funds, for example, have similar returns over long periods of time.

Good luck,

-Tom

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This is pretty close to what I'm shooting for. A simpler version is 1/3 small cap, 1/3 large cap, 1/3 international, all index funds.

Could someone fill me on on the 'emerging market' funds? How have these done historically and what do they usually include?

[Cubswin]

I am a realtive newbie at retirement investing and am still learning so someone step in if im out of line. Everyone seems to be talking about which fund to pick but but no one seems to be questioning putting the extra 5% into his 401k. I would think the OP would be better served taking the 100% match up to 10% and then taking then extra 5% and maxing out a Roth IRA. The Roth IRA would knock out his tax liability on the backend while giving him more investment options and freedom with his asset allocation. Am i way off here?

[KingNeo]

No. That is some great advice.