Tactical Advice for Purifying 401(k)

Salam all,

New to this community, forgive me if I’m not posting in the right place.

I’m hoping to work through the process of purifying my 401(k), but running into some issues along the way and looking for some guidance on the approach.

Oversimplifying for a moment, my understanding is

  1. Break down the portfolio
  2. Assess the holdings – what % is “compliant” vs “non-compliant”
  3. Calculate the growth
  4. Get rid of impure gains – “non-compliant” % * growth

Where I’m having some trouble is with (1) and (2).

(1) Break down the portfolio
My portfolio consists of the following funds:

  • Vanguard Target Retirement 2040 Trust Select
  • Vanguard Target Retirement 2060 Trust Select
  • Vanguard Institutional 500 Index Trust
  • Vanguard Mid Cap Index (VMCPX)
  • Vanguard Inst Total International Stk Mkt Index Trust

Each of these funds then needs to be double-clicked into to see the actual underlying funds. Taking the Vanguard Target Retirement 2040 Trust Select as an example, this consists of:

  • Total Stock Market Index Fund Institutional Plus Shares (VSMPX)
  • Institutional Total International Stock Market Index Trust II
  • Total Bond Market II Index Fund Institutional Shares (VTBNX)
  • Total International Bond II Index Fund
  • Short-Term Inflation-Protected Securities Index Fund Institutional Shares.

(2) Assess the holdings

Some of these funds are easy (e.g., VSMPX) to evaluate. I can search on Zoya and get a breakdown of their “compliance.”

Others, not so much (e.g., Institutional Total International Stock Market Index Trust II), because they’re not listed in Zoya. In this case, I can go look up a breakdown of all the underlying securities (here), but it’s literally a list of ~8k international securities.

Where that leads me is, (a) it seems quite impractical to go and search up every single one of these securities manually in Zoya (and this ~8k number is just from one of these funds), and (b) I doubt Zoya even has data for each of these international securities.

So what’s my next step? How can I effectively get a breakdown of my 401(k) holdings, which I can then find data on to evaluate it’s purity? Any advice is greatly appreciated.

Jazak Allahu khayr,
Adil

Salaam, and welcome @AdilM!

Target date funds are problematic from a shariah compliance perspective due to several reasons which I’ve mentioned in a previous post here. See if you have the option to invest all of your contributions into a single fund as opposed to spreading it between the 5 that you listed. If so, you may wish to consider opting for the fund with the lowest % of non-compliant holdings (in most cases, this ends up being the one that tracks the S&P 500).

Btw, the response above assumes the following:

  • You’ve already checked the list of available funds for shariah certified options like Amana Mutual Funds, Azzad Funds etc.
  • You’ve already inquired about switching to a self-directed account.
  • Your employer offers a match. If they don’t, there’s no need to opt-in to the 401(k) when you can just setup an IRA and self-manage.
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Thank you, Saad! Appreciate your thoughtful response.

And yes, totally agree – I do need to change my investments (and the reasons outlined the post you linked are definitely a huge factor). Thankfully, alhamdulillah, my employer has recently launched the option for a Self-Directed Brokerage Account, so I’m planning to switch to that iA.

In the meantime, though, the key challenge and question I’m facing is how I can go about purifying the existing gains in my account to-date. Even when attempting to simplify my calculations and ignore the adjusting allocations by viewing a “snapshot” of my portfolio today, I’m still unable to evaluate the compliance due to the issues described in my initial post (i.e., high volume of securities to screen + limited screening data available).

I empathize with your dilemma. Here are a few suggestions to estimate the purification amount for your existing gains:

  • For funds invested in bonds or interest-bearing securities, treat 100% of gains as non-compliant.

  • For equity funds, if an exact breakdown is not available in Zoya, a reasonable estimate may be in the range of 30-40% (based on the total % of non-compliant stocks in the entire stock market).

  • For target date funds, go to the fund provider’s website and dig into the asset allocation. Determine % in bonds vs equities, and apply the above principles. No need to analyze all underlying securities.

The main point is to make a reasonable effort based on available information. Do your best, ask Allah for guidance, and have faith you will be rewarded for the intention.

For added reassurance, I would suggest consulting a knowledgeable scholar who can review your specific situation and provide personalized advice. In my opinion, Sh. @Joe Bradford is the best person to speak with on this matter.

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Jazak Allahu khayr for the swift responses and the incredibly helpful input. I’ll work on following that approach iA.

May Allah put barakah in your time, and grant you all success in your mission.

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