Masonry Magazine September 2002 Page. 40
Finance Management
# "Take the Money and Run"
▼Wayne F. Currie
Financial Planner and Investment Advisor
Some of you may have seen the above-entitled NBC-TV special "Dateline" recently. Tom Brokaw jumped hard on some corporate executives, Global Crossing's CEO Gary Winnick in particular, and generally accused everyone in the financial advice business of being self-serving and biased.
It was a pretty persuasive piece of TV journalism. It surely caused many of those watching, perhaps even you, to run out and redeem their mutual funds and fire their brokers.
However, when you consider that there are 10,000 or more public stocks out there, it seems a little irrelevant to general investing to concentrate on exposing a few bad apples when most of the barrel is fine. And it's such a complicated issue for the average investor, what is legal and what is not, that it's somewhat useless information.
Brokaw did not resolve the major problems: What should you do with your savings? What should a masonry business owner do in light of all this?
One tends to get defensive in a climate like this. Many of our parents were bank account, savings account, and money market investors. This is a serious challenge at the moment. For example, one of the major banks in my area sent out an interest offer on money market and savings accounts last week, offering between 0.8 and 1.2 percent per annum. A high yield for a Certificate of Deposit, nationwide, for a three to five year period, might be 2.5 to 3.0 percent per year, payable at the end of the period with penalty for early withdrawal.
This is not attractive to most people at all. Even the low inflation rates we have had over the past couple of years are equal to this kind of inflation rate structure, meaning that postponing purchases equals zero or less net return. Still, it may be better from some people's viewpoint than seeing their fund investments go down in value every month. The current market situation leaves most people with a 401(k) or an IRA wondering what they should do with their monthly contributions.
There was a significant amount of investor redemption activity in mutual funds in May and June. They call this capitulation. What it really means is that that many investors simply gave up. This forces mutual fund managers to sell stocks that have already declined 50 percent or more, to pay out cash to investors, further pushing the market down. Now the market, the New York Stock Exchange and NASDAQ should be near the bottom.
What I want to do in this article is to identify what masonry executives and employees can do with their savings safely right now. Where can you re-deploy your much reduced portfolio assets to best take advantage of the likely recovery, and how can you go about doing so?
First, the important thing for most of us is that Congress has set up the right for businesses to establish deferred profit-sharing plans and pension plans of different types for their employees. Investing pre-tax dollars is the key to success, if at all possible.
This can be done as a Simplified Employee Pension Plan (SEP) for smaller employers and self-employed individuals (usually with no more than 25 employees). This plan allows participating employees to deposit up to 15 percent of their pay or a maximum of $24,500 in 2002 as a payroll deduction, without having any matching funds from the company. This maximum figure will increase slowly until it returns to the 2001 level of $30,000 in 2008.
Companies can contribute to this on a matching basis, up to 15 percent of gross When you consider that there are 10,000 or more public stocks out there, it seems a little irrelevant to general investing to concentrate on exposing a few bad apples when most of the barrel is fine.
payroll level, if they so agree. Company contributions will depend on profits and the amount contributed by employees. Total contributions for both employee and employer cannot exceed $24,500 in 2002.
The costs of such plans, with brokerage firms such as Incentive Capital, are usually minimal, generally $35 per year. Each participant selects their investments and employees will generally be asked questions to categorize their risk profile and long-term objectives.
Over a 10-to 20-year period, with no attributed growth on assets, you may find certain employees can set aside, on a tax-deferred basis, a maximum of $480,000, "maxing" out contributions for management or key professional employees. Important is the tax-deductible nature of the contributions which continue to accrue free of tax inside the plan until withdrawn.
The IRS has also set limits on the total amount that may be contributed to your 401(k) account from all sources combined, including any employer matching or profit-sharing contribution, and any employee after-tax contributions. For 2001, the maximum was the lesser of $35,000 or 25 percent of your total compensation. For 2002 the maximum is 100 percent of compensation or $40,000, whichever is less. The $40,000 limit will