#577: Q&A: The Efficient Frontier Was Perfect Until HR Got Involved

Kelsey is excited about investing along the efficient frontier, but it feels impossible with the lack of fund options in her employer-sponsored 401k. What’s the best way to deal with this problem?

Molly discovered that her rollover from a 401k to a traditional IRA hadn’t been invested in mutual funds and was still in a money market fund. Manually calculating her net worth helped her identify this oversight, and she shares her experience with us.

Former financial planner Joe Saul-Sehy and I tackle this in today’s episode.

Enjoy!

P.S. Got a question? Leave it here.

_______

Kelsey asks (at 01:56 minutes): How do you navigate the efficient frontier when you’re constrained by employer fund options? My employer-sponsored 401ks have limited fund options that don’t align perfectly with my desired asset allocation.

I’ve identified my ideal allocation based on the efficient frontier and my risk tolerance, aiming for a mix of large-cap growth, mid-cap growth, mid-cap value, and small-cap growth index funds.

But here’s where things get tricky:

• My old 401k has a Fidelity small-cap growth fund (FOCSX), but not the small-cap growth index fund I’d prefer (FECGX). It also has some Fidelity index funds and an S&P 500 fund, but nothing specifically for large or mid-cap growth or value.
• My new 401k only offers two equity options: a total stock market fund and an S&P 600 fund.

Together, my 401ks make up about one-third of my portfolio. My husband and I also have Roth IRAs, HSAs, and a taxable brokerage account. Should I invest in the less-preferred small-cap growth fund (FOCSX) in my old 401k and use our other accounts to fill the rest of the allocation?

Or should I stick with a total stock market fund in the 401k and rework my asset allocation—essentially going back to the efficient frontier with the requirement that 35 percent of my portfolio sits in a total stock market fund?

For additional context, I haven’t rolled over my old 401k to a traditional IRA because I do a backdoor Roth IRA every year.

Molly asks (at 49:28 minutes): I was listening to your episode about 52 tweaks to make in the new year. The second tweak is calculating your net worth a couple of times a year. I want to point out another reason this is so helpful. You can catch some little mistakes you might not have been aware of.

For example, I have a few retirement accounts from work and a Roth IRA. I didn’t realize until I was checking my net worth last year that when I rolled over money from an old employer 401k into a traditional IRA, the money hadn’t been invested into mutual funds. It was still in a money market fund.

So I needed to put that into the right asset allocation. And somehow, I hadn’t done that step until I did the net worth statement and realized that hadn’t been done. So just another reason to do it manually once or twice a year. You never know what you’re going to catch that you didn’t see somehow.

Resources Mentioned:

Watch this episode on Youtube

Episode with Paul Merriman

#570: The Compound Effect of 52 Tiny Financial Changes – Afford Anything

Portfolio Visualizer

Thanks to our sponsors!

Trust & Will
Trust and Will has simplified the process of creating and managing your will or trust online, from finding out what’s right for your family to finalizing documents with a notary. Gain peace of mind today with Trust and Will. Get 10% off plus free shipping of your estate plan documents by visiting trustandwill.com/paula.

NetSuite
NetSuite is the number one cloud financial system, bringing accounting, financial management, inventory, HR, into ONE platform, and ONE source of truth. Head to NetSuite.com/PAULA  and download the CFO’s Guide to AI and Machine Learning.