Financial / 401k advice for a 23-year-old engineer.

July 1, 2008 6:26 AM

Financial / 401k advice for a 23-year-old engineer. Considering the state of the economy and the price of oil, what should I do with my stocks. Also, I have the option for a 401k but I have no idea what type of 401k to choose.

I have around 30k in McDonalds stock that is up 80% from when it was bought for me when I was a kid. Should I hold onto it and weather the storm? I keep reading rumblings of a recession and stock market crash but is that just a scare tactic? I don't want to get kicked back down to a 30% gain on that stock when it's been doing so well up until right now. It has defintely been a long-haul stock but I'm afraid I'm going to lose all that I've built up over the last 23 years.

Also, I've had the opportunity to enroll in a 401k from my company for the last 6 months. I haven't done it yet mostly because I have no idea what to fill out on the form. I have the following options. Any recommendations? I believe my company matches up to 15%.

Should I go with option 1 or option 2?



1. I elect to contribute ____% or ____$ (per pay period) of my compensation as before-tax contributions to the 401(k) Plan until
such time as I revoke or amend my election.


2. I elect to contribute ____% or ____$ (per pay period) of my compensation after-tax as a designated Roth contribution to the
401(k) Plan until such time as I revoke or amend my election.

Note: The total of your before-tax and Roth deferrals cannot exceed 100% or $15,500.00. Your before-tax and Roth deferrals must be specified consistently (both as a percent or both as a dollar amount). If I am 50 years of age or older and I am eligible for a catch-up contribution, I understand I may exceed this total.

I also have all of these to pick from. No idea what to go with here. Considering the economy and what I hear, I'd probably rather take a semi-conservative approach.

Maxim Aggressive Profile II
Maxim Moderate Profile II
Maxim Conservative Profile II
American Funds EuroPacific Growth R3
Oakmark International II
Oppenheimer Global A
First American Small Cap Select A
MainStay Small Cap Opportunity A
Maxim Index 600
RidgeWorth Small Cap Growth Fund I
Lord Abbett Mid-Cap Value A
Maxim Ariel Small-Cap Value
Fidelity Advisor Mid Cap T
Fidelity Advisor Leveraged Co Stk - T
American Funds Growth Fund of Amer R3
Davis NY Venture R
Marsico Focus
Maxim S & P 500 Index
Maxim T. Rowe Price Equity Income
Oppenheimer Capital Appreciation A
RiverSource Diversified Equity Income R3
Van Kampen Comstock - R
Maxim Bond Index
Maxim Loomis Sayles Bond Portfolio
Maxim US Government Securities Fund
PIMCO Total Return Admin
Guaranteed Certificate Fund 36 Month
Guaranteed Certificate Fund 60 Month
Guaranteed Certificate Fund 84 Month
Maxim Money Market

Any help would be fantastic.

posted by decrescendo to work & money (20 comments total)

You definitely want to participate in the 401k, at least enough to take advantage of any company match.

Don't forget two key facts: you're 23 and this is a 401k. With rare exceptions, you cannot get at the money for almost 40 years. Increased risk will offer greater return, while conservative investments typically offer less. I'm not encouraging you to be speculative, but don't keep it all in bonds or money market funds for any length of time either. You have plenty of time to weather the storm and the market will likely reward you for doing so.

Also bear in mind that choosing funds with low expense ratios are very important. In the absence of any other advice, a simple and reasonable strategy might be to put it all into a low-expense S&P 500 fund. I am not familiar with the Maxim fund you listed.
posted by tomwheeler at 7:02 AM on July 1, 2008

You definitely want the Roth option. You pay your taxes on it now, and then when you eventually take money out, it'll be tax-free. Basically, Roth options are better if you expect to pay more in taxes at retirement - and between the fact that you're making the least money you ever will (hopefully!) and that taxes are probably going to be much higher in the future to pay for all the baby boomers - and certainly no lower - it's the better call.

As for which funds to pick, I'll let others offer precise recommendations, but you definitely want to *only* pick index funds - eg, those that are based on a list of stocks, rather than being actively traded (bought/sold).
posted by Tomorrowful at 7:03 AM on July 1, 2008

Who's managing your 401(k) for your company? Is it Fidelity? (Given the funds you listed..) If so, they have excellent education tools on their site, including suggestions on how to prorate your contributions based on how many years you have before retirement.
posted by xena at 7:28 AM on July 1, 2008

I haven't done it yet mostly because I have no idea what to fill out on the form.

This is why God invented the HR department. Use them. They will have MUCH better info than you will ever get here, because what you get here will be largely speculation about your particular situation and company's benefits package:

You definitely want to participate in the 401k, at least enough to take advantage of any company match.

Definitely true. As an FYI, most companies tend to match around 3% of your salary, though not necessarily the first 3%. For instance, they may match .5% for each 1% you contribute, up to a max of 3%, meaning you must contribute 6%. Again, talk to HR, but the point is this:

ALWAYS contribute whatever it takes to max out your company's matching contribution. It is FREE money.

You definitely want the Roth option.

Not necessarily. Again, this is something to talk to HR about, but personally I have a Roth IRA that I contribute to the max allowable each year myself (it's more flexible than a Roth 401) which means I am forced to use the traditional 401 at work. If you ever start freelancing or become self-employed, you can always contribute to a personal Roth IRA, but you can't to the Roth 401. Plus, having both is diversification and diversification is good.

you definitely want to *only* pick index funds

Again, not necessarily (in fact, this is probably a pretty bad idea). Again, talk to HR. You should have received, with that confusing form, a prospectus that details exactly what each of those funds are and how well they've performed in the past. You'll definitely want to target "no load" mutual funds, which have no fees, but there are cases when having an actively managed fund is preferable.

For instance, I'd definitely recommend you take a hard look at the "Oakmark International II." Given your own assessment of the American economy, you'll probably (if you're smart :) want to diversify some of your plan into international markets. Given that there is no such thing as an international index fund, this may be the best you can do, and I doubt many people could credibly tell you that having your 401 set up in 100% S&P 500 is preferable to, say, 80% S&P and 20% International (even though the international fund is actively traded and may have some [probably pretty low] fees, the benefits and protection you gain via diversification are more than worth it.

And unless you need the money now don't sell McDonald's. For every down, there is, eventually, an up.
posted by ChasFile at 7:29 AM on July 1, 2008

New England Financial seems to be my Plan Administrator
posted by decrescendo at 7:29 AM on July 1, 2008

We don't have much of a HR department.

We are a small 28-person, employee-owned company. I asked our "HR lady" and she basically didn't tell me a damn thing.
posted by decrescendo at 7:31 AM on July 1, 2008

I wouldn't sell the McDonald's stock unless you actually need the money. It'll be a taxable event and active investors are very unlikely to beat the market. One exception would be if you decided that as a one-time event you would sell it and buy in to an index fund as a means of diversifying. I have no specific information or insight about McDonald's doing worse or better than the market as a whole.

I would second the Roth option; doubly so if the company matches via a contribution to the traditional 401(k) (this is likely, but you should check) as this creates tax diversification. I obviously don't know your finances well enough to tell you what $ or % to put in the box, but do make it as much as you reasonably can.

Without the fund details it's hard to say, but the 'Maxim S&P 500 Index' is likely a good choice. You're looking for an index fund that has low expense ratios - for the S&P it should probably be less than 0.5%.

About the market crashing - you want this to happen (short of society actually collapsing). At your age you should embrace this event, not fear it. I'm going to say this again: You want the market to crash. The idea with stocks is that you buy low and sell high. A market crash means you get to buy really low and the enforced time horizon of a 401(k) means you'll be selling or rebalancing at higher prices. The last thing you want to do is spend your 20's and 30's buying overpriced securities in a market bubble only to them gain little to nothing during your 40's and 50's.

...personally I have a Roth IRA that I contribute to the max allowable each year myself (it's more flexible than a Roth 401) which means I am forced to use the traditional 401 at work. - Contributing to a Roth IRA does not prohibit you from contributing to a Roth 401(k). Either this person's plan is weird or they're misinterpreting the tax code (...or there's a slim chance I'm commiting tax fraud).
posted by 0xFCAF at 7:33 AM on July 1, 2008

With regards to the McD: If it was me, I'd sell it now and re-invest it all lots of things to get some diversity instead of having such a huge chunk of money in a single stock. I am not, as far as I know, you, though I'm also a 23-year-old engineer.
posted by Tomorrowful at 7:45 AM on July 1, 2008

I need to amend my previous statement about the McDonald's stock in light of looking more closely at future events in the capital gains tax. The good news is that if shit hits the fan really hard for you in the next two years and you find yourself in the 10% or 15% tax bracket, you could sell it and not pay any taxes on the gain. The bad news is that in 2010 the rate goes up from 15% to 18%, and depending on who gets elected in November, might go as high as 25%.

So if you think you're going to keep your job and sell it any time in the next ~8 years, now is probably the best time. You might consider using the proceeds to have a cash emergency fund and also make a contribution to a Roth IRA, or just use the cash as a buffer while you make a maximal 401(k) contribution, or all of the above.
posted by 0xFCAF at 7:54 AM on July 1, 2008

Yeah that's one of my issues with it. It's the only stock I have a lot of money in. It makes me nervous that I'm so "eggs in one basket" about it.
posted by decrescendo at 7:55 AM on July 1, 2008

This may also be the time to learn a bit more about investing. I picked up the Wall Street Journal Guide to Understanding Money and Investing because it was tiny and non-threatening.

I'll echo the advice to investing all your budget can spare into a 401K - not putting money away would be your only mistake.

As for individual funds, you can always look them up on Morningstar and compare their ratings:

Maxim Aggressive Profile II
Maxim Moderate Profile II
Maxim Conservative Profile II
Oakmark International II
Oppenheimer Global A

....well, you get the idea.
posted by Loser at 7:59 AM on July 1, 2008

The only thing I would caution about the Roth 401(k) is this: you can pull the money out tax-free at retirement ONLY if the laws governing these investments do not change. My paranoia may be getting the best of me, but I'm not convinced that in 25 years Congress will be able to keep their hands off of the $billions sitting in tax-free retirement accounts, regardless of what they promised the American people.

But you are 23-years old with some extra cash to put towards retirement (and an employer willing to match some of that investment). Congratulations! You practically can't lose in this situation as long as you think long-term, so just put your money somewhere and then review your funds once a year and make adjustments as you see fit.
posted by wabashbdw at 8:35 AM on July 1, 2008

Forgive the name, but IWillTeachYouToBeRich.com is an excellent place to learn about all sorts of personal finance tid bits. It isn't going to tell _you_ _exactly_ what to do with _your_ money, but it is all sorts of helpful for slightly more general topics.

My opinion:
-Max out what ever your employer matches in a 401k (Roth if they offer it), keep it diverse, no load, and toward the higher edge of your desired level of risk. This is free money, it doesn't get any better.

-After maxing that out, put remaining "savings" money into a Roth IRA (this maxes out at like 5k) also in something diverse (since you can reach in to this early without penalty for a few things) you might take something a little lower risk here, maybe the S&P 500 index that everyone here is pointing you at.

-After that is maxed, spend a little to celebrate, you are now ahead of 95% of your peers

re: MickyDs, do whatever makes you warm and fuzzy. If I were you, a little diversification would warm me up a bit, and make me a tad fuzzier. Think about maybe trading away 2/3s of it and buying something in a different industry with each 1/3 (then you can still have the fun of watching a ticker without groaning every time one of them takes a hit).

Keep truckin'!
posted by milqman at 8:36 AM on July 1, 2008

You say that your HR lady is unhelpful, but really at the bare minimum she should be able to answer the questions, "Does the company do matching in the 401(k)? How much do I have to contribute to get the maximum amount of matching?" If you're asking her questions about how much to contribute in general, or what funds to pick, or whether to go with a traditional 401(k) or the Roth 401(k), I'm not surprised she's unwilling to answer--many HR departments don't want to get into a potential situation where an employee comes back years later and sues for bad advice.

My advice? If you're 23, and don't have children or a mortgage (yet), I'd contribute the absolute maximum you're able to the Roth 401(k) (as in, $15K per year, if your salary allows, or however much you can contribute and still pay rent and have some left over). As your life moves forward, you'll probably not find yourself in a situation where you have less financial obligations than you do now--particularly if you get married, have children, have parents that start to need financial help, buy a house, and so on. If you max out now and throw a big chunk of change into your retirement, I think you'll open up a lot of opportunities for yourself down the road--like if you decide you want to quit to open your own business, or stay home with kids for a few years, or just take a long sabbatical and travel the world--and you won't miss the money too much, as you're probably coming off being a student with low cash flow anyway.

And I'll second what tomwheeler said above: you're young. You're not going to see this money for 40 years. Inflation should be a MUCH larger worry for you than investment risk; we're heading into a time where many people predict that we're going to start to see the price of a lot of stuff go up. If you don't invest aggressively enough to at least keep pace (let alone grow above the inflation rate!), then you're going to end up with even less than started in real terms down the road. Look for index funds with low fees and low turnover (both should be prominently displayed on each prospectus).
posted by iminurmefi at 8:38 AM on July 1, 2008

With rare exceptions, you cannot get at the money for almost 40 years.

Or after changing jobs and transferring the money to an IRA, where it is available for withdrawal (at a ~7% penalty¹) any time you want.

and depending on who gets elected in November, might go as high as 25%.

Actually Obama's soak-the-rich tax proposals are just that; from what I've read recently, the tax rate hikes are introduced at ~$250K incomes and greater.

--

1- IRS imposes a 10% penalty but this penalty is deductible.
posted by yort at 9:33 AM on July 1, 2008

Regarding the 401k thing ... there's one piece of information missing: does your employer match both pre-tax (401k) contributions AND post-tax Roth contributions, or do they take the more common route of just matching the 401k?

If they will only match the 401k contributions, I would put whatever is necessary to max out their "free money" into it. E.g., if they match 50 cents on the dollar up to 15 percent of salary (which is ridiculously large; I've never heard of a company matching that high—most are 1:1 to 3% or 1:2 to 6% in my experience) then I'd put in 15% of salary.

Whatever you do, don't leave money on the table; max out whatever gets you the employer contribution.

I've never known a company that would match Roth contributions, but if they will do that, I'd max out the Roth first, then put the rest of your money (up to whatever they'll match) into the 401k. For a young worker, the Roth is a pretty good deal—you pay taxes now, but the money grows tax-free and you pay no tax when you withdraw it, at least according to my understanding. It's so good, in fact, that the IRS imposes some fairly strict limits on how much you're allowed to contribute each year. The max is $2500/yr, I think, so you want to be sure to put that in.

Since the Roth has a relatively low per-year maximum, it's important to start one and start putting in the max per year, as early in your career as you can. Even if your company doesn't match funds into the Roth, I'd be sure to max it out anyway (although I'd think about using a different investment company besides the one that does your company's retirement, in order to get the lowest loads/fees possible—I really like Vanguard for this reason).

In terms of funds, I'm personally big on index funds and have almost all my money in them. Obviously this isn't where you'll want to keep your money forever (as you get closer to retirement you'll want to move it to lower-risk investments) but I think it's pretty good for a young person who just wants growth and low-maintenance, without getting shafted in management fees. Whatever you do, be very cautious about putting your money in "hot" funds, especially ones recommended to you by an "adviser" working for a financial-services firm. Today's hot sector could be tomorrow's dot-bomb; remember that it's always the little guys who get screwed and left holding the bag when bubbles burst.

So, in short: if your company matches into the Roth, max the Roth using their matching funds, and then put all the rest of their matching funds (since the Roth ceiling is low) into the 401k. If they don't match Roth contributions, contribute enough to get all the matching funds you're entitled to, and put it into the 401k. Then go and open your own Roth with a low-fees company like Vanguard, and max it out, out-of-pocket.

Regarding the stocks ... I'll leave that up to the real financial mavens, but I'd be uncomfortable having that much money in any single stock. I'd start diversifying and move the money into an index fund instead; maybe a whole-market, S&P 500 (what I have), or one of the others. It would just make me nervous having such a large percentage of my net worth in a single company's stock.
posted by Kadin2048 at 9:54 AM on July 1, 2008

I keep my money in a 401k instead of the roth 401k. My reasoning is this: I support the Fair Tax which would mean only taxing purchases and not taxing income. If this ever makes its way into law (you never know in the next 40 years), the money being taken out of the 401k would not be taxed either. I'm sure they'd try to compensate people with the roth IRA's and 401ks, but I still would prefer to be safe. Just an argument on the side against roth 401k.

Also re: McDonald's stock: I would probably sell the stock and diversify into different things. Unless you have 200k in stocks and McDonald's is only 1/6th of your total investment, you would really kick yourself in the face if the stock completely fell. They probably won't, but I'm sure people felt the same about Enron and WorldCom. I would take the money and reinvest into other avenues. You'll pay 15% on the profit, but at least you have some good profit to pay taxes on!
posted by ets960 at 11:12 AM on July 1, 2008

Maybe this is obvious, but maybe it isn't: your decision about your McDonald's stock doesn't have to be all or nothing. You could sell half of it (for example) to lock in your gains to date on that portion, and buy a broad index fund or ETF to diversify ... and let the remainder ride to see what happens.

As for which funds to pick, read the recent Money magazine article The Only 7 Funds You'll Ever Need. It looks like you won't have their specific fund recommendations, but it will help you pick out the categories and how much you should allot to each. The sidebar Where to Hold Your Investments is also helpful.

And as Loser suggests, look up each fund at Morningstar. The basic info is free, and they rate their relatively category performance from 1 to 5 stars. More is better, but don't agonize between minor differences; it's not such a precise tool that a difference of one star is critical. That said, I'd be wary of the 1s and 2s. And though it isn't included in the star rating, watch the expenses.

Morningstar also has plenty of free reading to help you educate yourself in investing. You'll need to register, BTW, but it's free and they don't spam you.
posted by pmurray63 at 6:57 PM on July 1, 2008

Some of those funds have really high expense ratios. This is the percentage of your investment you lose each year for the privilege of investing in the fund, and it covers both the fund's expenses and profits for the managers. Anything over .20% for an index fund is high. The Maxim S&P 500 fund offered by your plan, unfortunately, has a rather high expense ratio of .60%. Some of their managed funds have expense ratios greater tha 1%.

Compare the Maxim fund with the Vanguard Index 500 fund, which is the exact same thing. It's got a .15% expense ratio. So you're paying four times as much to invest through your plan.

Here's an article that outlines some options for when your employer's plans funds are lousy. For instance, you can open a Roth IRA on your own and invest up to $5000 in anything you choose.
posted by lsemel at 8:02 PM on July 1, 2008

I've never known a company that would match Roth contributions, but if they will do that, I'd max out the Roth first, then put the rest of your money (up to whatever they'll match) into the 401k. For a young worker, the Roth is a pretty good deal—you pay taxes now, but the money grows tax-free and you pay no tax when you withdraw it, at least according to my understanding. It's so good, in fact, that the IRS imposes some fairly strict limits on how much you're allowed to contribute each year. The max is $2500/yr, I think, so you want to be sure to put that in

You're confusing a Roth IRA with a Roth 401(k). The maximum contribution to a Roth IRA is $5,000 this year, and the maximum contribution to a Roth 401(k) is $15,500 (both of these are subject to income limitations).
posted by 0xFCAF at 1:05 AM on July 2, 2008