Question: 401 (k) SSAIR Retirement Plan Options Notes: · Tax-deferred (deposits
ID: 2783845 • Letter: Q
Question
Question:
401 (k) SSAIR Retirement Plan Options
Notes:
· Tax-deferred (deposits made into plan are deducted from pretax income). No current taxes paid on that money
· If salary was $50,000 per year, contributing $3000 to 401(k), pay taxes on only $47,000 income.
· No taxes paid while invested in plan, but you pay taxes when you withdrawal at retirement
· Company has a 5% match. (will pay up to 5% match of salary but you need to contribute to get match).
401 (k) Option Notes
· Most mutual funds (portfolio of assets)
· Return of find is weighted average of return of assets owned by fund, minus any expenses.
· Largest expense typically is management fee to fund manager (who makes all investment decisions for the fund).
Investment Options
· Company Stock
o Currently privately held
o Company stock expected to go public in 3-4 years (until then, price set by board of directors).
· B. S&P 500 Index Fund
o Mutual Fund that tracks S&P 500.
o Stocks in fund weighted = S&P 500
o Fund return ~ the return on S&P 500 minus expenses
o Index fund purchases assets based on composition of index, the fund manager not required to research stocks and make investment decisions. (results in low fund expenses).
o Charges 15% of assets per year
· B. Small-Cap Fund
o Primarily invests in small-capitalization stocks. (returns on funds more volatile
o Fund can also invest 10% of its assets in companies based outside of U.S.
o Charges 1.70% in expenses
· B. Large- Company Stock Fund
o Primarily invests in large-capitalization of stocks of companies based in the U.S.
o Funds managed by B. Company owner (outperformer of market for the last 6 of 8 years)
o Charges 1.50% in expenses
· B. Bond Fund
o Invests in long-term corporate bonds issued by U.S. domiciled companies.
o Restricted to investment bonds with investment-grade credit rating
o Charges 1.40% in expenses
· B. Money Market Fund
o Invests in short-term, high credit quality instruments (including treasury bills)
o Return on money market fund is only slightly higher than the return on treasury bills.
o Credit quality and nature of short-term, make it slight risk of negative return
o Charges .60% in expenses.
3. Assume you decide you should invest at least part of your money in large-capitalization stocks of companies based in the United States. What are the advantages and -disadvantages of choosing the B Large-Company Stock Fund compared to the B S&P 500 Index Fund? Provide Analysis of each option (pros and cons)
Explanation / Answer
Between Large Company Stock Fund and S&P 500 Index Fund, there are some advantages and disadvantages of both. The Large Company Stock Fund will be actively managed by the fund manager. It will invest in large capitalization stocks and the charges are also less as compared to the index fund. Since the fund will be actively managed by the fund manager, he/she will try to ensure that the portfolio is such that the investors earn the maximum profit. It has the power to change the companies in which the money is invested. This will lead to better returns for the investors.
Most of the stocks of the Index fund are those of the large stock companies. In Index fund the fund manager need not carry out active management of the fund. They simply purchase the assets as given in the index. The charges of index fund are high. Thus, investing in Large Company stock Fund looks better than investing in Index fund.
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