Volume 68: To submit a question to MFI's panel of experts, please write to us.

This week's panel:

Richard Chiozzi Richard E. Chiozzi is a founding principal of Successful Financial Solutions, Inc., a fee-only financial planning and registered advisory investment firm based in suburban Chicago. Richard is a Certified Financial Planner (CFP), and a Registered Securities Principal. He has been in the financial service industry since 1981 and has lectured at NAPFA and ICFP national and regional conferences. Richard is a frequent author on financial planning issues in leading financial publications and also hosts a one-on-one cable television talk show in suburban Chicago. Richard can be reached at his website or call (800) 417-1141.

Greg Hilton Gregory Hilton is a Fee-Only® financial planner in the heart of Chicago. He is an attorney with a masters degree in taxation, a CPA, and a certified financial planner (CFP). Although his services are comprehensive he concentrates on the tax and investment issues of retirement and estate planning. His registered investment advisory is Cambridge Consulting, 500 N. Michigan Ave. – suite 1530, Chicago, IL 60611 (312)527-5171 E-mail: cc@cambridge.cnchost.com

Questions and Responses

• Is there a benefit to owning funds prior to the ex-dividend date?
• Would I be better off with a loaded fund?
• Is my 401k allocation sound?
• How can an employee get fund choices within a 401k plan?

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Is there a benefit to owning funds prior to the ex-dividend date?

from KK

Q: How are most company stock fund dividends posted to accounts (calculated in the NAV)? For example, a participant owns units of company XYZ stock fund within a 401k/ESOP, on ex-dividend date cash is received and additional shares purchased. Under this scenario, is there a benefit to owning units prior to ex-dividend date?

A (Richard): In your example of a tax deferred account, there is no advantage or disadvantage if you purchase a company stock fund immediately prior to a dividend distribution since the dividend is not subject to current taxation. In a taxable account, however, it does make a difference.

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Would I be better off with a loaded fund?

from John

Q: I am considering a mutual fund.  Besides the commission, what are the differences between load and no load funds.  Would I get more service with a load fund?  What about personal attention? 

A: (Richard) You may receive more attention from a person who sold you a loaded fund, but if he or she leaves the firm, someone else may be assigned your account who may not be willing to invest the time. You will get lots of personal attention if you keep buying and probably very little if you don’t continue to buy. Most fund families have plenty of information available on the Web or by calling the fund directly.

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Is my 401k allocation sound?

from Lora

Q: I'm 28 and put roughly $700 in my 401k monthly. My allocations are 20% in each of the following:

Guaranteed Interest Account 3 year
Guaranteed Interest Account 5 year
Money Market Account
Government Securities Account
Stock Index 500 account

I also have access to other investments such as Bond Emphasis Balanced, Stock Emphasis Balanced, U.S Stock, Large Company Value, Large Company Blend, Large Company Growth, Medium Company Blend, Growth, Small Company Blend, International Stock, and Real Estate.

Is this a sound distribution, considering the impending Y2K issue and the effect it might have on stocks, in general? Should I spread this out differently if I am looking to retire in 20-25 yrs?

A: (Greg)   First, the Y2K effect on the economy in general and specific investments in particular will be unknown until the clock strikes midnight on New Year's Eve. It is going to affect businesses and industries to differing degrees and the best way to protect from it is to diversify as much as possible.

Second, based upon your age and investment horizon you have the worst 401(k) allocation possible. I have done some analysis with portfolio optimization software and with limited knowledge concluded that you could be doing much better. Your current 401(k) has a probable rate of return of 8.00% with 3.81% risk (as measured by standard deviation). If you allocated 50% to the balanced funds, 30% to the growth oriented funds, and 20% going to the REIT and international funds you would get a return (based on historical averages and assuming good quality funds) of 12% with a proportionate increase in risk.

Should you be willing to accept that extra risk for that extra return. I would say yes considering that this is very, very long-term money. Currently you are investing like you will need the money for a spring vacation. The higher return you will get by being more growth oriented could very well move up your retirement date by several years. Now will that be worth accepting a little more risk?

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How can an employee get fund choices within a 401k plan?

from Mike

Q: I would like to know if a company can use a mutual fund, like Vanguard, so that employees can choose their fund investment percentages between available funds. Are there financial institutions that would allow a company to offerits employees a cafeteria of mutual funds, individual stocks, bonds, etc. in which to place their tax deferred investments from a 401k plan? Can the employees make changes on a daily basis? Are the costs of having these funds managed high?

We have a restricted sort of 401k plan in that we only have three choices and we can only make changes once per quarter. Many of us employees believe that we should have many more options, including the ability to put a portion into a single stock, like Wal-mart, etc., and to be able to make changes more often, even daily. I am trying to find available institutions, that are legit, and which can provide this service for us at a very low cost.

A: (Greg) 401(k) retirement plans have been around since 1978 and the main thing to remember is that they are set up and sponsored by your employer. It is then up to you to decide whether and how to participate. The Sponsor (your boss) will decide all such details as participant loans, hardship withdrawals, distribution rules, life insurance options, rollover rules, employer contributions and matching, vesting of employer contributions, and the number and types of investments to choose from.

Nearly all Sponsors will get a financial institution like Fidelity, Vanquard, Scudder, or a bank to provide the investment vehicles and administer the plan. The more liberal the plan and the more options, the more expensive it is going to be for the Sponsor to maintain the plan. From your letter I can tell that your employer has opted for a bare bones plan. The minimum number of investments allowed for a 401(k) happens to be the number of choices in your plan - three. Your sponsor also allows you the minimum option to move or transfer funds within the plan - at least quarterly.

You are right to want more choices for your plan and the flexibility to change things around more often. Unless you change employers the only thing to do is to talk to your employer and lobby him to develop a more attractive 401(k) plan. Plan administrators have become highly computerized and therefore competitive in recent years and your boss might be surprised that a more flexible 401(k) would not cost him much more.

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Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.

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