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Author: AON2013 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25265  
Subject: 401K help! Date: 1/11/2013 1:32 PM
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I am hoping to get the opinion of experienced investors regarding my 401K situation. I have ended up with a large percentage of company stock in my 401K portfolio (real foolish I know). My current company stock price is just below $9 and my cost per share I estimate at $16. I seems that the stock will not reach $16 any time soon given the fact that the stock has fluctuated between $5 and $12 the last few years. However I do have 20 years until retirement and I work for a dow-jones company. Every month my company matches 6% of my salary in company stock. What would most experienced investors do:
• Cut my losses and simply move my money to other more diverse investments. My company 401K has many ETF options for example
• Stay put and hope that at some point over the next 20 years my company stock rebounds. Every month my company continues to match 6% of my salary in stock
• Stay aggressive and realize that I am buying company stock at a bargain price. Possibly even move more money to company stock in order to bring down my cost per share. At some point over the next 20 years the stock will rebound
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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24995 of 25265
Subject: Re: 401K help! Date: 1/11/2013 2:19 PM
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You say the company matches 6% of your salary in company stock. Do you mean they give you 6% of your salary in stock automatically, or they match your purchase up to 6%? If they are just giving you the stock and your cost basis is zero, then your profits are $5 to $15 a share. If they are matching your purchase, then your cost basis is half the price of your purchase, since you receive 2 shares for every one bought.

In other words, if your salary is $50,000 and you spend 6% of that on company stock, $3000, you will end up with $6000 worth of stock after the company match. If your stock price is $10/share when purchased, your effective cost will be only $5/share since you will hold twice as many shares as you bought.

If, over the next 20 years, the stock price increases, your double positions (your purchases plus the matching contributions) will have a similar effect to dividend reinventing. Your doubling of shares will allow you to double your gains, while at the same time it would halve the cost of your losses if the company goes in the opposite direction, offering a small cushion.

The real question is what you think of the company. Does management have their heads on straight and they are navigating a temporary downturn? Do you make or provide a sold product or service for which there is a long term market in which the company is a respected competitor? Would you invest in this company if you were not an employee receiving matching shares?

The last question may be the hardest to answer because we are often emotionally attached to our work and view our employers either through rose or shroud colored glasses.

You would also be wise to be concerned how much of your portfolio is weighted in company stock. Since the company is already lowering your cost basis through matching contributions, it is probably not necessary to increase your accumulation rate to lower your cost basis. Instead, I would look at building out the rest of your portfolio, adding investments outside of the 401k in a Roth IRA, relations investing, or adding additional investments inside the 401k if you like the non-company stock options.

The idea is that you can reduce your company stock investment as a percentage of your portfolio by growing the size of your portfolio. This has the added benefit of improving your overall retirement savings situation. It is impossible to know where the market, or your company will go over the next 20 years, but the good news is you have plenty of time to find out.

Fuskie
Who recalls that when Time Warner bought Turner Broadcasting, his TBS shares bought through an ESPP account over 6 years shot through the roof, even though Time Warner ended the ESPP, but when Time Warner was bought by AOL, the options they threw at us never broke the surface, remaining under water until I left the company...

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Author: AON2013 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24996 of 25265
Subject: Re: 401K help! Date: 1/11/2013 3:51 PM
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Thank you Fuskie.

To clarify; my company will match 6% in company stock but my contribution can be allocated to any of the other investment offerings as long as it is at least 6%. The last couple of years I have been putting my contribution in ETF's and just taking the company match in company stock.

I think you are saying that it would be wise to contribute at least 6% of my salary in addition to the company match because at that point I am essentially buying the stock at half price. I work for a large aluminum producer, you probably can guess who it is. I do believe in the company and I do believe in the innovative products it develops. There should be a large demand for lighter/stronger/less expensive products in the foreseeable future. I would expect that at some point over the next 20 years the stock will rebound.

Thank you for your advice.

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24997 of 25265
Subject: Re: 401K help! Date: 1/11/2013 4:08 PM
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So you are saying if you invest 6% in any option available in your 401k, the company matches with the same amount in company stock and you don't have to purchase any company stock yourself? That's what we Fools call Free Money. Your cost basis is zero. Instant profit. So by all means, contribute 6% in a investment in which you believe to continue to accumulate your free shares. Then contribute to your Roth IRA the max you can ($5000) for both you and your spouse (if married), then if you like your 401k, contribute more or find a better savings goal for any excess can.

Fuskie
Who loves free money and misses the days when he had a 401k and could earn some...

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Author: bmillz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24998 of 25265
Subject: Re: 401K help! Date: 1/11/2013 4:16 PM
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To clarify; my company will match 6% in company stock but my contribution can be allocated to any of the other investment offerings as long as it is at least 6%. The last couple of years I have been putting my contribution in ETF's and just taking the company match in company stock.

The clarification is helpful for giving advice.

Since the company gives you the match regardless of where you invest your contributions, you shouldn't let the fact that they are buying the stock influence where you place your contributions.

Pretend for a moment the company match doesn't exist. If that were the case, what investments would you purchase with your contributions. The stock purchase shouldn't factor in your decision. In essence, it's a free money bonus that your company is giving you.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24999 of 25265
Subject: Re: 401K help! Date: 1/11/2013 5:15 PM
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bmillz,

You wrote, Since the company gives you the match regardless of where you invest your contributions, you shouldn't let the fact that they are buying the stock influence where you place your contributions.

This isn't quite true. You should avoid developing a concentration in your investment portfolio that involves the sector your employer is in. For instance if you work for a bank and let this stock accumulate, you could become heavily over-weight in financials.

- Joel

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25000 of 25265
Subject: Re: 401K help! Date: 1/11/2013 5:39 PM
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Fuskie,

You wrote, So you are saying if you invest 6% in any option available in your 401k, the company matches with the same amount in company stock and you don't have to purchase any company stock yourself? That's what we Fools call Free Money. Your cost basis is zero. Instant profit.

Cost basis is only really useful when accounting for capital gains. Capital gains are only meaningful when calculating taxes. In a tax-advantaged account, cost basis can be used to determine your total investment performance (capital gain or loss), but that really provides little useful value. But if you feel you need to track it, I would say you need to include the value of the employer match as part of the basis.

Even so, performance of an investment portfolio should be relative to some metric over a fixed interval - not relative to its cost basis. If you're really concerned about cost basis, I'd worry that you can't afford a loss of principal which would really restrict your investment options.

Also, So by all means, contribute 6% in a investment in which you believe to continue to accumulate your free shares.

I would recommend the OP develop a strategy of selling these shares from time to time. In the past, I've just set up my 401(k) to re-balance periodically in order to keep the ratio of company stock roughly the same over time. This forces you to buy company stock out of your own funds during down months/quarters/whatever and sell during up months/quarters/whatever - which is the entire point of re-balancing a portfolio.

Of course that begs the question, If he were considering his own employer's stock as an investment, would he buy it? If not, why should continue to hold it? He should also strive to understand his holding restrictions on his employer's stock. If he doesn't have a holding restriction on unvested shares, he might want to sell them immediately after the contribution and just use the funds as part of his regular portfolio.

For instance my employer offers direct company stock purchases in its 401k plan. However, the company match does not have to go to company stock. It might be the default option, but I can (and do) direct the funds elsewhere. To accommodate this, the fiduciary simply keeps track of the ratio of vested contributions to unvested contributions and assigns a value to any unvested portion. (The unvested portion being the amount that would be returned to your employer should your employment end today.)

- Joel

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25001 of 25265
Subject: Re: 401K help! Date: 1/11/2013 7:33 PM
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Cost basis is only really useful when accounting for capital gains. Capital gains are only meaningful when calculating taxes. In a tax-advantaged account, cost basis can be used to determine your total investment performance (capital gain or loss), but that really provides little useful value.

Sorry, but this is not completely true when it comes to 401(k) plans and employer profit sharing plans. These plans have a feature of being able to withdraw company stock with "Net Unrealized Appreciation" (NUA) and paying ordinary income tax (and any appropriate penalties) on only the basis of the stock. When the stock is sold, the profit over and above the basis will be taxed as a capital gain, rather than as ordinary income. At least for now, capital gains tax rates are generally lower than ordinary income rates, so this could result in fewer taxes being paid, especially if there is a low cost basis for the company stock.

Here's an article about the NUA process, with some advantages and some cautions: http://money.cnn.com/2005/12/22/pf/expert/ask_expert/index.h... You can also read about NUA in IRS Pub 575: http://www.irs.gov/pub/irs-pdf/p575.pdf

Please note - if one decides they want to use the NUA method of withdrawal for company stock in their plan, the stock CANNOT be rolled over to an IRA, so this is a decision that needs to be made first, before the rollover decision.

AJ

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25002 of 25265
Subject: Re: 401K help! Date: 1/11/2013 7:36 PM
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aj485,

You wrote, Sorry, but this is not completely true when it comes to 401(k) plans and employer profit sharing plans. These plans have a feature of being able to withdraw company stock with "Net Unrealized Appreciation" (NUA) and paying ordinary income tax (and any appropriate penalties) on only the basis of the stock. When the stock is sold, the profit over and above the basis will be taxed as a capital gain, rather than as ordinary income. At least for now, capital gains tax rates are generally lower than ordinary income rates, so this could result in fewer taxes being paid, especially if there is a low cost basis for the company stock.

You're right. I'd forgotten about that.

- Joel

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25003 of 25265
Subject: Re: 401K help! Date: 1/12/2013 2:28 AM
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Joel, when talking about cost basis, I referring to his suggestion about buying more company stock to reduce his cost basis. My point was that his cost basis was zero if he wasn't buying any of the stock himself. But you are right, and I should have added as an aside, that in a 401k, cost basis is irrelevant except in calculating performance.

As I mentioned, no single position should be overweight in one's portfolio and I recommended re-balancing if that became the case. I think I also asked the question of whether he believed that the company had growth potential or was likely to continue lagging or some such. I don't quite remember how I phrased it. But I would imagine there are probably restrictions on how soon he could actually sell the free company stock he was given should he decide he didn't want to invest in this company long term.

Fuskie
Who doesn't think we were saying anything different, just saying it differently...

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25004 of 25265
Subject: Re: 401K help! Date: 1/12/2013 12:54 PM
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I should have added as an aside, that in a 401k, cost basis is irrelevant except in calculating performance.

Unless one wants to save on taxes by using NUA to withdraw appreciated company stock.

AJ

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Author: AON2013 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25005 of 25265
Subject: Re: 401K help! Date: 1/12/2013 3:21 PM
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This is more information than I could have imagined. Thank you so much for your opinions, they will be taken into consideration as I manage my 401K. Thanks again!

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