Happy Independence Day!! Time for a quarterly update, as delayed as it may be. Although we just moved into the third quarter, I rebalanced on my usual May 10th date (but it has been a busy year on other projects, so I did not draft a correlated blog entry timely). Considering financial independence is the ultimate goal of personal investing, an update falling on Independence Day feels somewhat fitting!
During the past week, I heard a discussion on 1510 Money Radio about leaving money with a former-employer's 401(k) plan or moving it, and I tried to think of a single benefit for leaving it. There is far more control and flexibility in an IRA than in an employer's 401(k) plan, so by large, the benefits were to move the assets or, at least, it was a neutral impact to leave the money alone. The only scenario I could say was a benefit to leaving assets in a former-employer's plan (and the reason I had left my assets inside mine) was if the expense ratios were significantly less inside the employer's plan than in an individual investment. Strength in numbers.
I am not gaining much, necessarily, by leaving it with my old employer, but like I said, moving it into a rollover IRA would not have much more flexibility or control, so I strategically opted to leave it where it was.
Unfortunately, I have learned that Vanguard just limited its investment options allowed in its 401(k) plan, nixing two of the five funds into which I have been directing my assets for the past 10 years. Therefore, it may be time to roll my assets into an IRA to continue my current asset allocation. The flexibility is now better in a rollover IRA.
In the wake of numerous legal cases against employers offering limited selections and providing self-serving options in its employer-sponsored plans, this was a peculiar timing by Vanguard. They have conditioned their investors to utilize asset allocations and rebalancing for the past 40 years, so it is counter-intuitive that they would remove numerous sector funds that complete an independent allocation. For those 12 funds, the money was directed into their target retirement suite.
While these all-in-one funds are superb investments for novice investors who want to put all their assets into a single fund throughout their investing lifetime, target retirement funds should not be held in a robust portfolio with other investments, except as an intentional, strategic play (and even then, I would expect active investors to buy the index funds that the target retirement funds use directly). At best, the timing is peculiar. At worst, it was ill-fated. I would not be surprised to see this power-play backfire on Vanguard, which has had a handful of lawsuits in recent years (with very mixed results). Considering the benefits are two-fold for Vanguard: first, it forcibly increases the AUM in their target retirement suite, which is a highly competitive field in the industry right now, and secondly, and more damning, the expense ratio in the target retirement funds are higher than in at least some of the options that they have ceased offering. This move would cost investors more money in the long run, which is a legitimate basis for a legal complaint.
