Roth 401k/403b in Residency Analysis #illumedati


Hey guys, it’s Finance Fridays and as promised I’m going to do Roth 401k/403b in Residency Analysis.

Stock Photo from: Pixabay

If you’re new here, I’d recommend reading the prior posts in the series first:

Roth 401k/403b in Residency

How To

Residency Portfolios

This post will do further analysis. I’ll talk about how to approximate the Coffeehouse Portfolio to make use of TIPS and REITs.

This is outside the scope of the two simplistic options I presented earlier and is just more for educational purposes more than anything else. I would still recommend residents either utilize a Target Fund or a standard Stock/Bond split because there is less to know and worry about. However, this allows me to further analyze the individual fund offerings available and explain which one(s) I would choose for a Coffeehouse Portfolio.


I’m going to copy/paste the list of funds again here so you don’t have to refer back to the Residency Portfolio post:

Here is their list of fund offerings (as of 4/7/2017):

I have also provided links to their information on the ticker.

Target

T. Rowe Price Balanced Fund TRRIX
T. Rowe Price Retirement 2010 TRRAX
T. Rowe Price Retirement 2015 TRRGX
T. Rowe Price Retirement 2020 TRRBX
T. Rowe Price Retirement 2025 TRRHX
T. Rowe Price Retirement 2030 TRRCX
T. Rowe Price Retirement 2035 TRRJX
T. Rowe Price Retirement 2040 TRRDX
T. Rowe Price Retirement 2045 TRRKX
T. Rowe Price Retirement 2050 TRRMX
T. Rowe Price Retirement 2055 TRRNX

International

American Funds EuroPacific Gr R5 RERFX
Parametric Emerging Mkts Instl EIEMX
Hartford World Bond Y HWDYX
Vanguard Total Intl Stock Index Admiral VTIAX

Specialty

Morgan Stanley Inst Glbl Real Estate I MRLAX

(this is essentially a Real Estate Investment Trust [REIT])

Small Cap

Goldman Sachs Small Cap Value Instl GSSIX
Loomis Sayles Small Cap Growth N LSSNX

Mid Cap

Goldman Sachs Mid Cap Value Instl GSMCX
Touchstone Mid Cap Growth Inst TEGIX

Large Cap

Dodge & Cox Stock Fund DODGX
Harbor Capital Appreciation Instl HACAX
Vanguard Total Stock Mrk Index – Admiral VTSAX

Bond

Metropolitan West Total Return Bond I MWTIX
T. Rowe Price High-Yield Bond PRHYX
Vanguard Inflation-Protected Secs Adm VAIPX
Vanguard Total Bond Market Index Adm VBTLX

Other

SA 661 Stable Value Account (Fixed)
TD Ameritrade SDB Sweep Program (Brokerage)
TD Ameritrade SDB Securities (Brokerage)


What’s in a Coffeehouse Portfolio?

Whereas the other portfolios designate large index funds of either the US or International Stock Index Funds, the Coffeehouse Portfolio designates more specific asset classes categories:

“Stocks” ~60%
Large Blend (10%)
Large Value (10%)
Small Blend (10%)
Small Value (10%)
Total International (10%)
REIT (10%)

“Bonds” ~40%
Intermediate Term Bond Index 40%


Wait, a 60/40 split, isn’t that kind of too conservative for residency?

Correct. I would agree that a 60/40 split is conservative. However, from my understanding the Coffeehouse Portfolio was created to be 60/40 pretty much forever until retirement. Once you “set your funds” you just rebalance to 60/40 every year and there is beauty in that simplicity. I’ll talk about tuning this for 80/20 later in this post. However, let’s go over which funds out of the ones available to use that we would choose for the different asset categories.


Large Blend

This one is pretty easy. A Large Blend is a mix of Large Cap and Growth.

While it’s listed on Large Cap in the list of funds, Vanguard Total Stock Mrk Index – Admiral VTSAX is technically a Large Blend. (just click on the links)

(Click to Enlarge)

The other options:

Dodge & Cox Stock Fund DODGX is technically a Large Value Fund
Harbor Capital Appreciation Instl HACAX is technically a Large Growth Fund


Large Value

Well, we kind of already went over this already above, it’s the Dodge & Cox Stock Fund DODGX.


Small Blend

The Small Cap options are:

Goldman Sachs Small Cap Value Instl GSSIX which is technically a Small Blend Fund
Loomis Sayles Small Cap Growth N LSSNX which is technically a Small Growth Fund

So our choice is simple, we go with Goldman Sachs Small Cap Value Instl GSSIX 


Small Value

Unfortunately, there is no pure Small Value option.

So you may need to double up with Goldman Sachs Small Cap Value Instl GSSIX.


Total International

The International options are:

American Funds EuroPacific Gr R5 RERFX
Parametric Emerging Mkts Instl EIEMX
Hartford World Bond Y HWDYX
Vanguard Total Intl Stock Index Admiral VTIAX

“Total International” means the largest foreign index fund you can get. So this is pretty easy, we’re going to go with Vanguard Total Intl Stock Index Admiral VTIAX which is a Foreign Large Blend.

American Funds EuroPacific Gr R5 RERFX is technically a Foreign Large Growth Fund
Parametric Emerging Mkts Instl EIEMX is technically a Diversified Emerging Markets Fund
Hartford World Bond Y HWDYX is technically an International Bond Fund


Real Estate Investment Trust (REIT)

The only REIT option is under “Specialty”:

Morgan Stanley Inst Glbl Real Estate I MRLAX

You may not its expense ratio is kind of high at 1.05%.


Intermediate Term Bond Index

The bond options are:

Metropolitan West Total Return Bond I MWTIX  (Expense Ratio 0.43%)
T. Rowe Price High-Yield Bond PRHYX (Expense Ratio 0.75%)
Vanguard Inflation-Protected Secs Adm VAIPX (Expense Ratio 0.10%)
Vanguard Total Bond Market Index Adm VBTLX (Expense Ratio 0.05%)

Any of these are ok, but if you look at their expense ratios, Vanguard comes out on top.

So if you are following Coffeehouse Portfolio to exactly, you’d choose Vanguard Total Bond Market Index Adm VBTLX

If you are a believer in TIPS, then you’d go with Vanguard Inflation-Protected Secs Adm VAIPX


Well… that wasn’t too difficult…

You’re right. It wasn’t.

I feel as if whoever is in charge of choosing the funds for Albany Medical Center is someone just like me who understands the importance of low expense ratios and Vanguard index funds, but still wanted to offer people who want to the flexibility of a Coffeehouse Portfolio to have good options. Ideally, I’d prefer if they went with a Vanguard Target Fund instead of T. Rowe Price,because their expense ratios are lower, but hey it’s fine.


So what’s my Coffeehouse Portfolio look like?

If you use the 60/40 split you’re looking at:

Large Blend – 10%: Vanguard Total Stock Mrk Index – Admiral VTSAX
Large Value – 10%: Dodge & Cox Stock Fund DODGX
Small Blend – 10%: Goldman Sachs Small Cap Value Instl GSSIX
Small Value – 10%: ~Goldman Sachs Small Cap Value Instl GSSIX (see above)
Total International – 10%: Vanguard Total Intl Stock Index Admiral VTIAX
REIT – 10%: Morgan Stanley Inst Glbl Real Estate I MRLAX

Intermediate Term Bond Index – 40%: Vanguard Total Bond Market Index Adm VBTLX

(or Vanguard Inflation-Protected Secs Adm VAIPX)


I dunno, I think 60/40 is too conservative for me, can I use 80/20 as a Coffeehouse Portfolio?

Sure.

Just move 20 out of the bond and divide them evenly among the others: 20/6 = 3.3

So for an 80/20 split you’re looking at:

Large Blend – 14%: Vanguard Total Stock Mrk Index – Admiral VTSAX
Large Value – 13%: Dodge & Cox Stock Fund DODGX
Small Blend – 13%: Goldman Sachs Small Cap Value Instl GSSIX
Small Value – 13%: ~Goldman Sachs Small Cap Value Instl GSSIX (see above)
Total International – 14%: Vanguard Total Intl Stock Index Admiral VTIAX
REIT – 13%: Morgan Stanley Inst Glbl Real Estate I MRLAX

Intermediate Term Bond Index – 20%: Vanguard Total Bond Market Index Adm VBTLX

(or Vanguard Inflation-Protected Secs Adm VAIPX)

For simplicity, I just rounded some the extra 0.3s into Large Blend and Total International to make all the numbers whole. I chose Large Blend and Total International because those should have the least volatility overall (and the lowest expense ratios).


Ok, so is the Coffeehouse Portfolio better or worse than the two “easier” options?

It’s not better or worse, it’s just a little different. However, the reason I gave the two other options first are because they are easier.

The Target Fund

has a 0.76% expense ratio, which isn’t great, but because it’s the easiest, and “set it and forget it”, it’s an “ok” option overall for those who don’t want to worry about rebalancing.

The 80/20 or 70/30, Three Fund Portfolio using Vanguard

has expense ratios of:

0.04% (Total Stock)
0.11% (Total International Stock)
0.05% (Total Bond) or 0.10% (TIPS)

The Coffeehouse Portfolio (with these funds)

has expense ratios of:

0.04% – Large Blend: Vanguard Total Stock Mrk Index – Admiral VTSAX
0.52% – Large Value: Dodge & Cox Stock Fund DODGX
0.95% – Small Blend: Goldman Sachs Small Cap Value Instl GSSIX
0.95% – Small Value: ~Goldman Sachs Small Cap Value Instl GSSIX (see above)
0.11% – Total International: Vanguard Total Intl Stock Index Admiral VTIAX
1.04% – REIT: Morgan Stanley Inst Glbl Real Estate I MRLAX

0.05% – Intermediate Term Bond Index: Vanguard Total Bond Market Index Adm VBTLX or 0.10% (TIPS)


So overall, using the 80/20 or 70/30 three fund portfolio has lower expense ratios than either the Target Fund or Coffeehouse Portfolios for this fund.

Could the Target Fund of Coffeehouse portfolios do better than the Vanguard three fund to offset the increased expense ratios?

Sure, it’s possible, but it’s not a sure thing. However, keeping your expense ratios as low as possible is a sure thing for keeping money in your pocket.

So for me, following The Philosophy is the most important thing.


So what do you do?

I have very little money in my 403b. I really wish I had more.

When I first started putting money into my 403b in Residency, I was advised to “just stick to a Target Fund”. I switched this out later once I realized that the expense ratio was higher than I liked.

My current setup is the three fund portfolio I outlined above in an 80/20 split.

Stocks (80%):

Vanguard Total Stock Mrk Index – Admiral VTSAX

Vanguard Total Intl Stock Index Admiral VTIAX

Bonds (20%):

Vanguard Total Bond Market Index Adm VBTLX

I will rebalance 80/20 every year for the foreseeable future.


What’s your final recommendation?

This shouldn’t come as a surprise, but I think the best option is still to do a Three Fund Portfolio of either 100/0, 80/20, or 70/30 depending on your risk tolerance. The differences in expense ratios between the Target Fund and Coffeehouse Portfolio is a lot. I don’t believe those funds will do better than the Vanguard funds to offset the difference in expense ratios.

Even the ease of “set it and forget it” that comes from the Target Fund isn’t worth it in my opinion.

The Vanguard funds available here are so easy to pick that you should just use them, and rebalancing every year is not difficult.


TL;DR

This is mainly just an exercise in approximately a Coffeehouse Portfolio with the funds offered.

The three fund lazy portfolio is what I do mainly due to the expense ratios.

My recommendation for those at Albany Medical Center is to do the same.

It is doubtful that the Target Fund or Coffeehouse Portfolio will be able to outperform the Vanguard funds on a consistent basis to offset the difference in expense ratios.

 

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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