How I Picked a New Fund for My 403(b)

I replaced a mutual fund in my 403(b) account, which is similar to a 401(k) plan. This was the first such change I’ve made to my workplace retirement plan in over a decade. I replaced the Vanguard FTSE All-World ex-U.S. Small-Cap Index Admiral fund (VFSAX) with the Vanguard Total International Stock Index Admiral fund (VTIAX).

Long-term relative performance is the reason why. I’ll show you what factors I looked at to demonstrate my decision-making process.

I used three tools on AAII.com, as well as Vanguard’s website, to analyze my options. The first was our Mutual Fund Evaluator. This provides a detailed snapshot of each mutual fund, including annualized and annual performance. You can access it by typing a fund’s name or ticker symbol into the search box at the top of the site. The Compare Funds page enables you to make side-by-side comparisons of two or more mutual funds. Both tools are available to all members. The third was our Mutual Fund Screener. It is available to A+ Investor and Platinum subscribers. I used Vanguard’s website to get more insight into the specific geographic allocations and the fund holdings.

The Vanguard FTSE All-World ex-U.S. Small-Cap Index Admiral has underperformed its foreign small/mid blend category peers over the past three-, five- and 10-year periods. On an annual basis, it has underperformed the category average during six out of the last 10 full calendar years. It is underperforming the category average year to date as of the end of September. If the year-to-date trend continues, it would be seven out of 11 years with underperformance. (Prior to 2019, the fund was only available as an investor class fund.)

The Vanguard Total International Stock Index Admiral provides similar geographic exposure, though with larger-cap stocks. Its performance has been closer to its category average—besting its foreign large blend category peers during five out of the past 10 years. It is also on pace to outperform this year.

Comparing the two funds, the large-cap Vanguard Total International Stock Index Admiral has outperformed the small-cap fund Vanguard FTSE All-World ex-U.S. Small-Cap Index Admiral over the past three-, five- and 10 years. Vanguard Total International Stock Index Admiral also has a slightly lower expense ratio: 0.12% versus 0.17%. To be fair, this was more of a cherry on top since five basis points (bps)—$0.50 per every $1,000 invested—is a small difference relative to all the other factors that influence returns.

My choices are limited to Vanguard mutual funds because that is what AAII’s 403(b) plan offers. Vanguard has only five admiral class funds in the foreign small/mid blend and foreign large blend categories. I passed on the Vanguard Developed Markets Index Admiral fund (VTMGX) because I wanted broader exposure. The Vanguard International Core Stock Admiral fund (VZICX) was not launched until 2019. In addition, it is actively managed and, most importantly, not available in my 403(b) account.

I strongly considered the Vanguard FTSE All-World ex-U.S. Index Admiral fund (VFWAX). It has a similar concentration in its top 10 holdings (11.3% versus 10.1%) as the Vanguard Total International Stock Index Admiral. Unfortunately, it was also not available in my 403(b) plan.

No Rebalancing This Month

I check my 403(b) allocation at the end of October and the end of April to determine if any rebalancing is needed. The threshold for rebalancing is having one or more funds accounting for either less than 15% or more than 25% of the account’s value.

The Vanguard 500 Index Admiral fund (VFIAX) was right at the boundary with a weight of 24.9%. Because investing is messy and the difference between a 24.9% allocation and a 25.1% allocation is meaningless over the long term, the choice to rebalance or not was a judgment call. I chose to hold off since the best six-month period for the S&P 500 index is between November and April.

If I am wrong, the market will bring the portfolio’s allocations back toward the target of 20% per fund. If I am right and the S&P 500 continues to outperform, I’ll rebalance the account during the first half of 2025.