Request for Feedback on iDeCo Asset Allocation

[Merican]

Hi Everyone,

I am in the process of helping my wife (33, Japanese, full-time company worker) sign up for iDeCo. Before we open an account, I'd like to get some feedback from forum members.

1. Do I correctly understand what the funds are?
2. Does the asset allocation make sense?

We are thinking of opening an account with Rakuten. This is based mainly on a simple brand preference. We will also get some additional points through Rakuten Marketplace by signing up for a brokerage account. SBI Securities does have a cheaper equities fund, but it is only cheaper by 2 basis points ( ＳＢＩ・全世界株式インデックス・ファンド（雪だるま（全世界株式）） Expense Ratio 0.10800% ). Is it silly not to go with the cheapest fund and SBI?

My plan is to go with a simple set it and forget it 75 / 25 portfolio:

75% 楽天・全世界株式インデックス・ファンド（楽天・バンガード・ファンド（全世界株式））パッシブ Expense Ratio 0.12960%
25% たわらノーロード国内債券 パッシブ Expense Ratio 0.15120%

My understanding is that the first fund is a world equities index fund, basically with similar (the same?) holdings as VT (Vanguard Total World Stock ETF). My understanding of the second fund is that it is a passive Japanese bond fund.

By the way, Retire Japan's iDeCo guide has been extremely helpful and informative in this process for anyone who hasn't purchased it yet.

Looking forward to hearing what everyone thinks.

Thank you,
Merican

[Michel]

I read somewhere in the forum that the problem with Vanguard is that it's being taxed three times.
Someone needs to confirm that though

[Merican]

Thanks for pointing that out Michel. I would like to know more about tax implications too. I couldn't find anything on the forum about that, but in a recent post on Retire Japan blog, Ben noted that Rakuten's Vanguard fund is "essentially VT [Vanguard Total World Stock ETF] in a Rakuten wrapper" and that "the problem with VT is that it has some US tax issues and includes two layers of fees (although it is much cheaper than the alternatives in the Rakuten iDeCo, so this is a bit of a moot point)." Is this what you are referring to?

https://www.retirejapan.com/blog/optimizing-ideco/

[adamu]

Here's the post I think is being referred to. Good luck

viewtopic.php?f=11&t=184

TLDR; both the Rakuten and SBI funds are wrappers of US ETFs (Vanguard in Rakuten's case, Schwab in SBI's). This isn't ideal from either a fee or tax perspective.

It's probably better to go with an alternative such as eMaxis Slim's all country option (the only alternative in a single fund at the time of writing, I believe). Although I noticed that's not available for iDeCo on SBI's platform (probably because they prefer their own product), not sure about Rakuten. If that's not available, the other option is to try to duplicate it by mix and matching your own funds.

Follow-up threads:

viewtopic.php?f=11&t=310

viewtopic.php?f=11&t=419

[Merican]

Thank you very much adamu for the useful information and links. Looking at the Rakuten iDeCo the Vanguard fund has the lowest expense ratio and there don't appear to be any good alternatives available:

楽天・全世界株式インデックス・ファンド（楽天・バンガード・ファンド（全世界株式））パッシブ Expense Ratio 0.12960%
https://www.dcnenkin.jp/search/product. ... &item=774A

For the SBI Select Plan iDeCo the cheapest fund by expense ratio is the SBI world fund and as adamu said it is a wrapper of a Schwab fund making it less than ideal for tax reasons. Even though it's the cheapest fund, is it also not ideal for fees? Are there hidden fees or something?

パッシブ ＳＢＩ・全世界株式インデックス・ファンド（雪だるま（全世界株式）） 0.10800%
https://www.dcnenkin.jp/search/product. ... &item=223C

There are alternatives:

パッシブ ｅＭＡＸＩＳ Ｓｌｉｍ全世界株式（除く日本） 0.15336%
パッシブ ｅＭＡＸＩＳ Ｓｌｉｍ国内株式（ＴＯＰＩＸ） 0.17172%
https://www.dcnenkin.jp/search/product. ... &item=223C

I think the eMaxis Slim funds would basically cover the same stocks as the SBI fund, right? Despite higher expense ratios (+0.04536 / +0.06372) would the two eMaxis Slim funds be superior choices to the SBI due to tax implications?

[adamu]

I think the eMaxis Slim funds would basically cover the same stocks as the SBI fund, right? Despite higher expense ratios (+0.04536 / +0.06372) would the two eMaxis Slim funds be superior choices to the SBI due to tax implications?

The eMaxis Slim All Country fund follows the same index as the SBI one (MSCI All Country), so they are equivalent although may differ slightly in implementation. But although that's available for the NISA, it's not available in iDeCo in Rakuten or SBI. The mix-and-match of All World (ex Japan) + TOPIX is slightly different, because the TOPIX index differs from the MSCI Japan index. But I think the difference is negligible.

The tax issues as far as I understand them are for both Rakuten and SBI, you're paying capital gains on the stocks in their source country, and then again in the US due to the underlying ETF being based there, and then again in Japan due to the fund wrapper being based here. In an iDeCo, you don't pay the final Japan portion due to the domestic tax relief, but you do pay the US part. With a purely domestic fund like eMaxis Slim, the US portion is eliminated (except for the US stocks, of course). None of this is very transparent, as far as I can tell from my attempts to read the prospectuses.

I also have an objection to paying a fee (basically 100% of the underlying ETF fee, last time I checked for Rakuten) to SBI and Rakuten for just wrapping up another fund. At least with eMaxis slim, they have put their own fund together.

I think the choice for what to do it a personal one. I'm planning on using the two eMaxis funds you mentioned with a 90/10 international/domestic split for simplicity. But if you really don't want to think about it, the Rakuten or SBI funds will also work. Trying to calculate the long term implications of the fee/tax differences is beyond me, but I think jcc had a go in some of the threads I linked above.

[RetireJapan]

I'm not 100% sure about this, but I think the tax issues boil down to the following two:

1. the US withholding tax on dividends (not capital gains). This is taken at source and cannot be claimed back in a tax-exempt account like iDeCo or NISA. I think it is 10% (but might be 30%) levied on dividends worth 2-3% so results in a 0.2-0.3% a year drag on the investment. The thing is, US shares in Japan listed funds would also be subject to this, so in reality the extra penalty for holding a US fund is about half (or 0.1-0.15% a year). If the annual cost difference was bigger than this it might be a better option.
2. potential inheritance tax liabilities. The IRS claims inheritance tax on foreign held US listed investments, although I believe the US-Japan tax treaty shields Japanese residents from this.

I'm not sure about the fees. The Vanguard wrapped funds appear to include both the Vanguard fee and the wrap fee, and are still cheaper than alternatives so I'm not sure if that is a problem.

Something I am thinking about for my own Rakuten iDeCo account.

Anyone else?

[Merican]

Excellent information in the last two posts. Thank you both. In the end it seems the cost differences are quite small. As adamu said, either plan would still work. I think I will go with Japan based funds in an SBI Select account. The overall expense ratio is still very reasonable.

65% ｅＭＡＸＩＳ Ｓｌｉｍ全世界株式（除く日本） 0.15336%
10% ｅＭＡＸＩＳ Ｓｌｉｍ国内株式（ＴＯＰＩＸ） 0.17172%
25% ｅＭＡＸＩＳ Ｓｌｉｍ国内債券インデックス 0.15012%
https://www.dcnenkin.jp/search/product. ... &item=223C

Any feedback regarding the above asset allocation?

[adamu]

65% ｅＭＡＸＩＳ Ｓｌｉｍ全世界株式（除く日本） 0.15336%
10% ｅＭＡＸＩＳ Ｓｌｉｍ国内株式（ＴＯＰＩＸ） 0.17172%
25% ｅＭＡＸＩＳ Ｓｌｉｍ国内債券インデックス 0.15012%
https://www.dcnenkin.jp/search/product. ... &item=223C

Any feedback regarding the above asset allocation?

That's quite heavy on domestic bonds. Any reason you're not diversifying the bonds internationally too? For example, 三菱ＵＦＪ国際－ｅＭＡＸＩＳ Ｓｌｉｍ 先進国債券インデックス 0.1836％ looks promising (although I have not researched the bond funds, so don't know how it looks under the hood).

[TokyoWart]

1. the US withholding tax on dividends (not capital gains). This is taken at source and cannot be claimed back in a tax-exempt account like iDeCo or NISA. I think it is 10% (but might be 30%) levied on dividends worth 2-3% so results in a 0.2-0.3% a year drag on the investment.

This 0.2-0.3% is also what I have calculated in the past. When I first figured it out it surprized me that it was so small.