Dear Dr. Don,
I have $233,000 in my 401(k). Most of it is in my employer’s stock. The returns on this account have run from between 15 percent to 28 percent over the past 10 years. When I recently worked on a target retirement plan with a large mutual fund provider, the representative wanted to put my money in mutual funds with expense ratios between 0.26 percent and 0.37 percent. I am 52 years old and plan to retire at age 67. I’m now wondering if I should allow the provider to decide where to invest my money.
— Cautious Curtis
It pays to get professional tax advice when dealing with company stock in a retirement plan. The ability to move the stock into a taxable brokerage account at retirement, or if you resign, and to pay capital gains tax versus income tax on the net unrealized appreciation is an important tax advantage that anyone in this position should consider.
The benefit of moving to mutual funds provides much-needed diversification as opposed to having all retirement funds invested in just one company. If you have most of the $233,000 in your 401(k) plan invested in one company’s shares, you need to look at spreading the risk around. It is not a good idea to have all of your proverbial eggs in only one financial basket.
These relatively low mutual fund expense ratios quoted by the fund provider sound attractive. So, on that basis, you should consider investing in the mutual fund family.
If you have significant capital gains from the company stock, you might consider allocating future contributions to the mutual funds, while holding on to the stock. You’d be accepting the risk associated with a possible decline in the stock’s value between now and retirement without adding to the position. Also, you might consider hedging strategies outside your 401(k) plan to minimize losing value in the company stock. Be careful of the potential cost involved, in any case.
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