A 29 year old reader writes--
Dear Uncle Bill,
I'm preparing to open a ROTH IRA since my 401k covers my pre-tax investments. I have my 401k invested into a 2040 lifecycle fund that tracks indexes. I've read a bit of information about Vanguard and T.Rowe Price. My 401k lifecyle fund is similar to the Vanguard lifecyle funds except they have a higher expense ratio. My gut tells me to go with T.Rowe Price because they invest more into international stocks and overall more into stocks throughout the funds life. My head tells me to go with Vanguard because their low expense ratios will continue to pay off. What's your take on Vanguard vs. T.Rowe Price?
Signed, Torn Between
Dear Torn Between,
As you can tell from my blog, I am a big fan of Vanguard. That being said I have an IRA in two TRowePrice accounts. Being lazy I haven't moved them but I should as fees are lower at Vanguard but inertia is a powerful force in our lives. Leaving that aside, let's look at the facts of the two funds.
After a brief review of the company web sites I believe the two comparable funds are the Vanguard Target Return 2045 and T. Rowe Price 2040. The Vanguard fund is 70% in domestic equity indexes, 12% in European indexes and 6% in the Pacific equity index. 12% is in bonds. The expense ratio is .21% and the minimum investment amount is $3,000.
The T. Rowe Price 2040 Lifestyle fund is 67.9% in domestic stock indexes, 21.6% in foreign equity indexes, 7% in bonds, and 3.5% in cash. (Hope this all adds up to 100%.) The expense fee is .8% with a $1,000 minimum for IRA's and $2,500 for all other accounts.
Four things jump out. The international component for Vanguard is 18% for Vanguard vs a slightly higher exposure of 21.6% for T.Rowe. To me, not enough difference to get real excited about.
As your correctly point out the Vanguard fee is lower by .6% or $24 a year on a $4,000 account. No big deal but pennies count and you would certainly bend over and pick up $24 if it was lying on the sidewalk so worth pocketing if the two funds are basically the same.
There is one place I think Vanguard is really blowing it and that is in the minimum account balance. TRowe will let you in for $1,000 for an IRA while Vanguard sticks with that stupid $3,000 minimum. Investors in IRA's are slow to move and once in a fund tend to stay there. Witness my IRA's at TRowe Price. Vanguard will argue that the minimum keeps out the riff raff and lowers expenses which lowers fees and I'm sure they argue this all the time at corporate but I would adjust the minimum downward for retirement accounts.
BUT the biggest thing I don't like about BOTH funds is the bond aspect and here is where things get sticky. The question is Do You Want More Than 10% Of Your Retirement Money Tied Up In Bonds And Cash And Increasing Every Year As You Get Older?
Only you can answer that but if I'm in something for 35 plus years I probably want all my money in stocks because, historically, stocks have outperformed bonds and cash by three or four percent annually and that money really adds up with compounding and reinvesting. I'm not sure at 29 I want 10% plus of my money sitting on the sidelines.
So here is my strategy--if you have the minimums of $3,000 go to Vanguard and put together a mix of domestic and international index funds that matches your desired allocation and enjoy fees averaging about .2%. If you don't have the minimums, go to TRowe Price and put together the same portfolio in their pure index funds but expect about .4% in fees.
OR just do any of these things, including the Lifestyle funds, and pat yourself on the back. You are doing great. You are in the game building wealth and being in the game is the important thing.