ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, January 6, 1997 TAG: 9701070124
SECTION: THE MONEY PAGE PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
ARE you taking advantage of your 401(k) plan at work? If you are contributing to your plan, how should you allocate your money?
Andrew M. Hudick, a certified financial planner with Fee-Only Financial Planning L.C. in Roanoke, said he sees many people who are not participating in plans available to them on the job.
That's despite the fact many of these plans include a matching feature, meaning employers will match at least a portion of workers' contribution, giving an immediate boost in employees' earnings.
Every working person should contribute to such a plan if it is available at work, Hudick said. "Companies and government are becoming less likely to support us during our retired years," he said, as pensions and Social Security stand to become less generous.
But 401(k) plans should be only a part of your portfolio. You must fit your 401(k) investments into the total picture of your finances.
Conventional wisdom says that you should put your 401(k) and other tax-sheltered plans (such as Individual Retirement Accounts) into bonds while investing in stocks outside of such plans.
The reasoning is that most stock investments return very little money by way of taxable income in the form of dividends. The average is about 2 percent.
This contrasts with bonds that may return 7 percent in taxable income in the form of interest.
Bonds gain little or nothing in value, on the other hand, while stocks have been on a roll in recent decades. But the gain in stocks is not taxed until the shares are sold, and even then it's at the reduced capital gains rate of 28percent.
Thus, the idea has grown that you should hold bonds inside of sheltered programs, where the tax on the relatively high interest is deferred. The gain in the value of stocks is sheltered in any case until you sell.
Hudick said, however, that a contrarian view has built in recent years. This holds that you do the reverse: hold stocks on your 401(k) or IRA and buy the bonds outside of such plans.
That's because stocks may - or may not - continue their steep climb. And the conventional wisdom assumes that people will hold their stocks for a lifetime rather than buying or selling. People are taxed on their gain when they sell.
Hudick said he tends to favor fixed-income bonds in a 401(k) plan if the employer offers good choices. He would complete the investment model for a client by buying stocks outside the retirement plan.
But you have to judge your own case. You may want your 401(k) in stocks if you think they will beat bonds over the long run, if you prefer mutual funds with a history of paying out capital gains distributions, and if you don't want to manage and trade your portfolio.
Hudick said many people are employed by large corporations that grant a portion of the matching money in the form of company stock.
In addition, he said, those companies may also provide their workers with other retirement benefits, such as a small pension and lifetime health insurance.
If the company experiences financial problems, he pointed out, the employees could lose these valuable benefits as well as the value of their retirement plan. This happened, he said, to employees of the former Holdren's Inc. and the former Dominion Bankshares Corp.
Last year Holdren's sold its assets to a North Carolina retailer and its stock, in which many employees had invested their 401(k) plans, became virtually worthless.
When First Union Corp. took over Dominion several years ago, he said, many layoffs followed. These former employees cashed in their Dominion stock in their pension plans, he said, and many continuing workers sold their stock because of their concern about their future.
In the case of First Union, Hudick said, the former Dominion employees need not have sold in a panic. Those who held their First Union shares have received impressive returns, he said.
But the lesson, Hudick said, is to avoid holding much company stock within your company retirement plan.
People should also remember that their 401(k) represents only a portion of their overall investment program, Hudick said.
Absent a better plan, he said, they should choose the best investment available. Typical options include a fixed-rate investment (such as bonds or a guaranteed investment contract), small cap fund or an Index 500 fund. The last tracks the performance of the Standard and Poor's Index of 500 stocks.
Hudick said people should complete their asset allocation by buying the missing pieces with monies outside their 401(k) plan.
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