Yes, you can keep 401(k) costs in check
In fact, it is possible to manage 401(k) plans for well under 0.75 percent. I’ve written about it for years. It can be done by any worker who invests in index mutual funds or exchange-traded index funds. It can be done by following William Bernstein’s directions for “the coward’s portfolio,” Bill Schultheis’ instructions for his “coffee house portfolio” or building my Couch Potato Building Block portfolios. (You can read about them, their trailing time period performance and their history at www.assetbuilder.com.)
You can, for instance, build the most basic Couch Potato portfolio (50/50 total domestic equity market/TIPs) using Vanguard mutual funds with a starting investment of $6,000. Its annual expense ratio will be less than 0.20 percent. And there will be no commissions to pay.
But suppose you want more inflation protection? Is there a simple, low-cost way to build such a portfolio – a way to use an account at Fidelity, Schwab, TDAmeritrade, E-Trade, Bank of America, USAA or any other discount brokerage platform?
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Yes. Use low-cost, exchange-traded funds. Buy equal amounts in each of six categories. Here’s the recipe. Note that three parts – TIPS, REITs and energy – are recognized inflation hedges.
Combine equal parts:
• Vanguard Total Stock Market ETF (ticker: VTI) with an expense ratio of 0.07 percent. This fund allows you to buy the entire domestic stock market.
• iShares TIPS ETF (ticker: TIP) with an expense ratio of 0.20 percent. This fund gives you ownership of an inflation-protected portfolio of U.S. government securities.
• iShares MSCI EAFE ETF (ticker: EFA) with an expense ratio of 0.34 percent. This fund allows you to buy the entire equity market of the developed economies.
• SPDR Barclays International Trust Bond ETF (ticker: BWA) with an expense ratio of 0.50 percent. This fund gives you broad ownership of international government bonds.
• Vanguard REIT ETF (ticker: VNQ) with an expense ratio of 0.10 percent. This fund tracks a broad index in domestic real estate investment trusts.
• SPDR Energy ETF (ticker: XLE) with an expense ratio of 0.21 percent. This fund tracks an index of major energy companies.
Put more in the pot each year. Rebalance as necessary. Simmer for as long as possible.
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