Opinion on better index fund for 401K

Apple Aussii
Jun 1 25 Comments

After reading Tony Robbin’s Money Master the game book. I started regretting investing in high expense Mutual funds under my 401K plan. My employer’s 401K plan offers around 15 funds and the following two looks promising both in expense ratio/other fees vs performance since inception.

Vanguard Institutional 500 Index (ER 0.01%; returns 14.53% since inception @ 2016)

BlackRock LifePath Index 2050 fund (ER 0.05%; returns 11.88% last 10 years)

The former, Vanguard’s, as the name says follows S&P 500 index but just covers US Domestic market.

The latter, BlackRock’s, holdings include 48% of Russell 1000 index, 33% BlackRock international index, 13% Real estate index, 3% of commodities index, rest includes US debt index and TIPS.

The former is less diversified (at least in this comparison) but yields more yearly returns. Whereas the latter is very much diversified but yields relatively lesser returns.

Which one is a better option among these two? BlackRock LifePath is an index fund but as any target date funds, will it be actively managed that may lead to higher expenses/fees that aren’t listed explicitly?

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TOP 25 Comments
  • Salesforce / Consultant
    BlindVole

    Salesforce Consultant

    PRE
    Cisco, IBM, SAP
    BlindVolemore
    Your 401k should just be part of your total investment portfolio. Pick the best fund available (likely Vanguard in this case) then balance/diversify via your other investment accounts.

    I highly recommend getting a Vanguard account if you like index funds. They make it very easy, and their funds all have very low loads.
    Jun 2 3
    • Apple Aussii
      OP
      Ok thanks, so go with above mentioned Vanguard 500 Index even though it’s diversification is limited to US Domestic Stock?
      Jun 2
    • Salesforce / Consultant
      BlindVole

      Salesforce Consultant

      PRE
      Cisco, IBM, SAP
      BlindVolemore
      It’s the best choice there. Opens vanguard account and balance by investing in small-cap and foreign stock indexes. Don’t forget foreign and domestic bond funds too (unless you’re really young).

      Search on CouchPotato and Bogleheads 3-Fund portfolios if you’re new at this and want a low-effort investment strategy.
      Jun 2
    • Apple Aussii
      OP
      Thank you!
      Jun 2
  • Intel / Other seabay
    Invest in one dedicated stock index fund viiix and one dedicated bond fund Vbtlx. Maybe summer reit fund. Let it ride until it's time to withdraw
    Jun 1 5
    • Apple Aussii
      OP
      Ok but would you do this within 401k plan? I.e, invest in REIT during summer and sell it off.
      Jun 2
    • Intel / Other seabay
      I meant some. I don't invest in reit funds.
      Jun 2
    • Apple Aussii
      OP
      Ok what’s your portfolio, if don’t mind.
      Jun 2
    • Intel / Other seabay
      Vtsax ~70% Vbtlx 30%. I follow what they call 2 or 3 fund portfolio. Quite popular with bogleheads
      Jun 2
    • Apple Aussii
      OP
      Thanks!
      Jun 2
  • Google watchfb
    401k is a long term investment and not short term. So I wouldn't go so much into each year's rate of return. But I would rather look at overall constituents to see if they can handle both upswing and downturn.
    Jun 1 4
    • Apple Aussii
      OP
      Ok does it mean, you would choose latter over former?
      Jun 1
    • Google watchfb
      Probably. Have the holding percentages changed over a period of time?
      Jun 2
    • Apple Aussii
      OP
      Ok but that’s automatically done in BlackRock LifePath Index fund as it’s designed with a glide path based on how many years left from the target date. Isn’t?
      Jun 2
    • Google watchfb
      Yes. Then that's good for long term.
      Jun 2
  • Tableau / Eng
    The Plague

    Tableau Eng

    PRE
    Microsoft
    The Plaguemore
    Vanguard if you plan to stay in the US. Don't invest on international funds
    Jun 1 3
    • Apple Aussii
      OP
      Yes, I do stay in US. It can change in the future but not in the near term. But why would that impact the decision of owning international funds or not? Can you clarify?
      Jun 1
    • Tableau / Eng
      The Plague

      Tableau Eng

      PRE
      Microsoft
      The Plaguemore
      The world has a lot of stuff going on, there's always conflict that will bring potential risk and lesser rewards.
      If you are staying in the US, and with the economy being so stable and being able to grow so much, it is better to stay tied to it.
      If the EU goes to shit, you shouldn't lose part of your savings. If USA goes to shit, then everyone around you is fucked so you are on the same boat :) and the rest of the world will go to shit too.
      Having lesser returns than the US economy while living there is not good. It means that you would lose money relatively
      Jun 1
    • Apple Aussii
      OP
      Ok makes sense :) But I want to highlight why I shortlisted BlackRock LifePath Index, because it includes REITs, Bonds as well. Kind of more diversified mix. If I go with Vanguard Institutional 500 Index, I don’t get this.
      Jun 1
  • Amgen Fin4eng
    Whichever aligns with your written investment plan and investment strategy. You should have both domestic and international. Ideally international between 20-50% of stock portfolio. Target date are not actively managed funds, they are still indexes just with automatic rebalancing
    Jun 1 3
    • Apple Aussii
      OP
      Are you saying “all” target date funds or the above mentioned BlackRock LifePath Index fund, is not actively managed? Btw owning international funds wouldn’t be more riskier considering currency fluctuations?
      Jun 1
    • Amgen Fin4eng
      The above target date is an index fund. You can have target date funds that are mutual funds. International funds are riskier from currency fluctuation but that is what diversity is and you want to avoid home country bias. Depending on your belief if US dominance and global nature of US companies, 20-50% is typically the right number for international stock. The average is around 30% and what vanguard recommends still I think
      Jun 2
    • Apple Aussii
      OP
      Ok thanks for your inputs.
      Jun 2
  • SAP Crazy7
    I would diversify- invest 50% in both funds.
    Jun 1 1
    • Apple Aussii
      OP
      Ok but the BlackRock LifePath Index fund already covers 48% of Russell’s 1000 which includes most of S&P 500. Doesn’t this approach an overkill?
      Jun 1

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