Drawbacks to Vanguard Target Retirement Funds for Roth IRA/401k?

Over at Reddit we cam across the following discussion: Drawbacks to Vanguard Target Retirement Funds for Roth IRA/401k? (self.personalfinance)

submitted 19 hours ago by bobo333

Hi,

I'm 25, have about $12k in a Roth 401k with Fidelity from a previous job. I've recently opened a personal Roth IRA account with Vanguard and am planning to roll over my Fidelity money to Vanguard so it's easier to keep track of my money and have it all in one place.

I guess I really have 2 questions:

1. Is there any reason not to roll it over Vanguard?
2. I am planning on putting it all in Vanguard's Target Retirement 2050 Fund. My second question is: is there any reason not to put it all in a target retirement account? I have no plans of withdrawing it before I retire (otherwise I wouldn't have put it in a Roth 401k to begin with). The only advantage I can think of is getting a slightly lower expense ratio (~.18% vs ~.05%) if I put it in an admiral account, but then I'd have to manage it myself, it's not as diversified, etc.

I'm by no means an expert, so it's entirely possible that I missed obvious things that I'm simply not aware of, so any and all advice would be much appreciated. Thanks in advance!

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[–]lightcloud5 3 points 18 hours ago

Right, target date funds do not benefit from Admiral shares, and you also can't practice tax-efficient investing if you use all-in-one funds (such as a target date fund).

That said, these things matter a lot more once your savings build up. For instance, at $12k, the difference between .18% and 0.05% is $15.60. There are so many other things we can do to save $15.60.

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[–]fox_91 2 points 18 hours ago

At what level should you consider what you mention? I'm approaching 25k in my vanguard 2050 fund

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[–]lightcloud5 3 points 18 hours ago

I mean, it's up to you. It's just a matter of how much the savings is worth to you.

For instance, I personally would be willing to pay a little bit of money to avoid having to rebalance my portfolio myself.

It also depends on your own individual preferences and how much you value your time vs money.

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[–]WestTexasRedneck 2 points 15 hours ago

If you don't mind skipping total international bond and are in one of the retirement 2040 or later funds, you can match it with $30k.

• 63% Total Stock Market Admiral ($18.9k)
• 27% Total International Stock Market ($8.1k)
• 10% Total Bond Market ($3k)

The limiting factor is the $3k minimum for Total Bond Market.

This would make your new expense ratio about .11% instead of .18%.

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[–]bobo333[S] 2 points 1 hour ago

Yeah, the amount of time I'd save by not having to rebalance and distribute funds myself is worth at least that. Thank you for the input though, wanted to make sure I wasn't missing something egregious.

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[–]Balltongue 1 point 16 hours ago

What do you mean when you say that you can't practice tax-efficient investing with a life path fund?

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[–]WestTexasRedneck 1 point 14 hours ago

If not all of your investing is in tax-advantaged retirement accounts, it benefits you to keep your bonds in tax-advantaged and own stocks in your taxable accounts because of the more favorable tax treatment. If you just buy target retirement funds in both accounts, it means you'll have some bonds in taxable and pay more taxes.

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[–]bobo333[S] 1 point 1 hour ago

Could you elaborate a bit more and/or point me towards a good resource explaining more in depth what tax-efficient investing is and how to utilize it?

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[–]WestTexasRedneck 1 point 1 hour ago

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

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[–]samthunder 2 points 18 hours ago

I'm at almost exactly 12k in my Vanguard Roth. I've heard of Admiral shares as well and I know you can convert pretty easily. Is this something everyone should do once they hit whatever the minimum is?

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[–]United Statesjenseits 2 points 17 hours ago

I thought I read that if you wait long enough, they'll convert the shares for you, but I'm not positive.

Unless you plan to split that money up into separate funds, sure go for it. I can't think of a reason to leave the funds as investor class if you are eligible for Admiral.

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[–]bobo333[S] 1 point 1 hour ago

According to this it looks like they won't do it for the investor automatically, but will notify the investor of eligibility and the investor can then opt to have Vanguard convert it. That's probably a good policy, don't like the idea of things happening to my money without my knowledge of it.

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[–]United StatesaBoglehead 1 point 17 hours ago

The $10k minimum for Admiral shares is per fund. This means that if your Roth allocation is split 1/3rd between the total bond market, total stock market, and total international index funds, you need $30k in your Roth to get Admiral shares for all of them. If your Roth IRA money is invested in the investor shares of a single fund you are good to go - just exchange them for the Admiral shares version.

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