Author: A.T.

Following up on the 401(k) comment I first did September 20 and some of the discussion since then, here’s an opposing perspective I hadn’t thought of, from Cola Allen.

“I like the idea of investing heavily in your own company’s stock — in or out of a 401(k). It must be a financially sound company. My reasoning is the culture (cult?) of downsizing. When a layoff is announced, the stock price generally rises. I consider it ‘my personal unemployment insurance.’”

Hmmm.

Could this be an example of “thinking outside the box” when the answer lies within the box? Well, it’s moot. No sane company would ever lay off such a creative thinker.

Lately, we’ve been talking about how to allocate your 401(k) assets, and you’ve taught me a thing or two. Now comes this question from a couple switching jobs:

“We plan to roll over our 401(k) to an IRA account at [a well known $18-a-trade deep discount broker named after the Roman goddess of grain from which comes the word “cereal” (and also the name of the first asteroid to be discovered), but I don’t want to name it, lest I appear to be plugging that firm, toward which I have warm feelings, but from which I wish to maintain my editorial independence — A.T.].

“We called and talked to the fund manager of our previous employer and were told that if we rolled over to an IRA account, no tax will be withheld and no penalty will be applied. Is this true? Is there any limitation such as gross income or $ amount that can be rolled over in one year? Is there anything that we need to watch out for?

“Our concern is that if our combined income is about 100K, can each of us roll over about 30K this year without getting any type of penalty? Please do not include my name or email address in your reply.”

The information you got is correct. The IRS places no limit on the size of a retirement account that can be rolled over from a company plan, once you leave your employer, to your own personal IRA rollover account. (Your other good option would be to roll the money over to your new employer’s plan, if you have a new employer, and if its plan accepts rollovers.)

Incidentally, you are wise to be rolling this money straight from your retirement fund to the IRA, rather than having it paid to you first and then passing it on. If you did that, 20% would be withheld for taxes (which you would not recoup until tax-refund time) and you would also run the risk of somehow missing the 60-day deadline to complete the rollover. Then you’d have to pay taxes and (if under 59-1/2) a 10% nondeductible penalty.

There are just a few arcane exceptions to what you can rollover, but these don’t apply to you, as best I can tell. The only one remotely worth mentioning is that voluntary after-tax contributions you may have made to your 401(k) cannot be rolled over. Very few people make these extra contributions, but many retirement plans do allow them. For anyone who did make these extra contributions, that money comes back to you free of tax (because you already paid tax on it). But the money those after-tax contributions earned remains happily under the shelter of the IRA rollover.

Tomorrow: The Last Word (for Now) on 401(k) Strategies

Recently, I suggested that putting all, or even many, of your 401(k) eggs in the your-own-company-stock basket — as an alarming number of participants seem to do — is dumb. (Would you advise a friend to put his or her entire retirement nest egg in your company’s stock? Then why do it yourself?) According to a survey cited by The Wall Street Journal, that’s where 42% of all 401(k) assets sit.

“Regarding your comments on 401(k) allocations,” writes Dennis Faucher of Hewlett-Packard, “did you consider that the percentage in company stock could be high because of aggressive company matching or discounts on stock purchase? This is no excuse for not being diversified, but may be one of the reasons that the percentage is so high.”

Well, no, I hadn’t considered this. See how self-employment can limit one’s experience? Dennis and others of you who were kind enough to point this out are certainly right: this twist must certainly skew the percentages somewhat.

As John McInnis explained: “Your column on 401(k)’s is right on the money — people do have too much invested in their company stock. But you and The Wall Street Journal missed an important point. Sometimes we have no choice. Take my own 401(k) as an example. I invest my contributions 100% in an equity fund. Yet when I got my latest statement, I found that roughly one-third of my retirement stash is invested in company stock. How can this be? Simple. My company (Sanders, a unit of Lockheed Martin) matches contributions 60% on the dollar to the first 8% of salary. A great deal! But there is one catch. The match is made entirely in company stock. We have no choice in this, nor can we reallocate it later on. This, coupled with the fact that the stock has done quite well lately, means that I (and probably most other employees here) are overweighted in company stock. Short of leaving the company, I can see no way out of this situation. I suspect that a lot of other big company 401(k) plans are similarly run.”

Tomorrow:v A 401(k) Rollover Question

“What I don’t understand is why more investors of the long term and hold type don’t just put a majority of their holdings (particularly Keogh and IRA) into BRK and go to sleep for ten years. You have the best money manager money can buy for free. Does anyone really doubt that he will do better than the historical average of 10% growth long term in equities? Are there really more than a handful of money managers who have done as well? The stock has always sold at a premium and always will, so accept the fact and buy it. To me it’s simple: if you think that (1) you can pick stocks better than Buffett, (2) you know he will die soon, or (3) you have found someone better than him to advise you than stay away from BRK. Otherwise load up and wait.”

Well, that one’s a lot harder to answer than the question from a couple of weeks ago about shorting BRK.

In the first place, if you do this at all, I disagree it’s “particularly” for a Keogh or IRA account — quite the opposite. Because BRK pays no taxable dividends, whatever benefit you get from buying and holding will come in the form of long-term capital gains — sheltered from tax until you sell, and then taxed at what’s likely to be a favorable rate. Whereas the same gain within a Keogh or IRA will be taxed as ordinary income, at the full rate, as you withdraw it. I’d use the tax-sheltering power of my Keogh or IRA to shelter the kinds of investments that generate taxable income (including capital gains you actually take every so often, as opposed to those that just mount untouched for decades), and hold investments like BRK in my regular account.

But what of the broader question? I certainly wouldn’t dispute Warren Buffett’s superior skill. But by this logic, NO price is to high to pay for BRK.

It may be instructive that Buffett himself was selling the stock, in effect, earlier this year — not his own, $100 million of new stock . . . but since he controls half the existing stock, it’s at least half like selling shares of his own.

He had a lot of good reasons — for example, at $32,000 a share, giving a child even one share exceeds the annual gift tax exemption — and so he wanted to issue a new class of shares in piddly little $1,000 chunks, 30 of which would equal a “real” share.

It was only a tiny amount of stock being sold (the overall company was being valued at $30-odd billion, so $100 million was spare change).

Still, the smartest investor in the world was selling Berkshire Hathaway stock. So what did the market do? It immediately bid the price of BRK up another $2,000 a share. If Buffett was selling, the market figured, it must be yet another brilliant move for Berkshire Hathaway, and so yet another reason to buy.

After hitting $38,000 a share, the stock is back down to around where it was when he issued the baby shares at $1,000 each (and they, too, are selling around the same price).

Can we assume it’s always a good buy and will “always” sell at a premium? Two events that could shrink that premium are Buffett’s eventual retirement and, perhaps more imminent, a cut in the capital gains tax. If you owned $5 million worth of BRK, almost all of it profit, might you not be tempted to take part of your profit if the tax bite shrank? At least for a while, eager sellers might outnumber eager buyers, damping down the premium.

In sum, if I did this at all, I wouldn’t put “a majority” of my holdings in BRK as my correspondent suggests. But maybe that’s because I feel like such an idiot for never having put ANY of my holdings there. Had I invested $10,000 in the stock when I first wrote about Warren’s brilliant annual reports, in a sort of “book review” for Fortune, I would have a cool million now. A hundredfold gain.

Oh, woe!

But for that same result to hold for the next couple of decades or so, my missed million would have to turn into a missed $100 million — and the total market value of BRK would have to grow to $5 trillion. Somehow I don’t see this happening.

I know, I know: you’d settle for a tenfold gain over 20 years. And do you know what? BRK just might produce it. That kind of appreciation works out to an impressive but not other-worldly 12.2% a year compounded.

But I wouldn’t put all my eggs into even the Buffett basket, and the eggs I did put there would come from outside my Keogh or IRA.

Tomorrow: More on 401(k) Allocation

From Frank Nash: “I question your recommendation of Lindner Dividend, categorically, and as a fund which “makes a little money in down markets.” In fact it lost money (-4.08 in ’87, -6.51 in 90, -3.31 in ’94) in the last three down markets while underperforming the S&P 500 for (at least) the last 15 years. A fund as mundane as Janus, has a lower (Morningstar) risk rating and has outperformed Lindner Dividend consistently.”

Thanks, Frank. You’re right that no one fund can categorically be recommended as the best. But my sense was that Syd didn’t want a host of options, he wanted a concrete suggestion to boost the return — conservatively — for his 96-year-old foster mother-in-law. My own feeling, based on what I’ve read about Eric Ryback, who manages this fund, is that Lindner Dividend is a good choice.

Janus has outperformed Lindner Dividend modestly over the last 5 years (15.4% compounded versus 14.3%) and very substantially over the last 10 (15% versus 11.2%). But Janus’ “standard deviation” — a measure of volatility and thus potential risk — was 2.2 versus 1.6 for Lindner. For example, during the bear market from July 1990 to October 1990, Lindner was down 3.6% while Janus was down 17.2%. So the Morningstar risk rating may not be the only number to look at.

Janus is 95% invested in stocks; Lindner Dividend is 43% in stocks, 39% in fixed income, 18% in cash — another reason to think it could be a more “defensive” holding for a 96-year-old.

(It is Lindner Dividend’s conservatism, of course, that accounts for its trailing the S&P 500 all these years. It’s pretty hard to beat a rising stock market when less than half your assets are in stocks.)

Lindner Dividend’s objective is to “generate relatively high current income and growth of income.” The Janus Fund seeks “maximum capital appreciation by investing in equity securities using aggressive investment techniques.”

So I stick by my suggestion, though not in the sense that it is the perfect recommendation (hey: free advice is worth what you pay for it!). I think it could double her income without taking what would seem to be, in the context of the situation, undue risk.

Thanks for your good question. And thanks to my friend Peter Tanous, author of Investment Gurus, due out at the end of this year, for his help with the answer.

From AASLCS@aol.com: “What about an IRA for a kid less than 14? After I saw a story in The Wall Street Journal, I asked my accountant and he said it does not make sense for an eight-year-old because the IRA is not a deduction for him.”

I don’t agree with that.

It’s hard to imagine what an eight-year-old could do to earn any money that would qualify for an IRA. (I once bounced up and down on Rayco seatcovers to demonstrate their ruggedness for a TV commercial, but that was long before IRAs, and I only got $10.) But assuming he or she has actually earned some money at arm’s length — getting paid by you for chores around the house won’t cut it — an IRA is a great idea.

No, your child probably doesn’t need the tax deduction. Indeed, she would not claim it. She would file Form 8606 for nondeductible IRA contributions. But look at the advantages. As per my July 19 comment:

1. Your child gets into a working/saving habit. This alone is priceless.

2. Maybe she learns a little about investing and capitalism. This can’t hurt, since it’s the foundation of our prosperity.

3. If your child puts $1,000 a year into an IRA from age 12 through 21 and then stops, and if the mutual fund grows at 10% a year, then the income from those ten summer jobs — $10,000 — will grow by age 70 (when withdrawals must begin) to $1.7 million. Net of 3% inflation that would really be only about $300,000 in today’s dollars. But how many 70-year-olds do you know today who wouldn’t be glad to have an extra $300,000 sitting in an IRA to boost their annual income?

Not all brokers and mutual funds will set up an IRA for a minor, but if yours won’t, I’m told Merrill Lynch and the Vanguard group of funds, among many others, will.

Tomorrow: The Janus Fund versus Lindner Dividend

“Last year my wife asked a cab driver in Amsterdam about his country’s politics. ‘We don’t have any,’ he said, ‘everything’s been decided.’” — New Yorker cartoonist Charley Barsotti, telling me why he was thinking of moving to Holland

Here, of course, everything’s not been decided.

A few weeks ago I wrote some comments suggesting that Bob Dole — though a fine man — had abandoned his life-long fiscal prudence in favor of a tax-cut plan he didn’t believe in that, if passed, would spook the bond market (rightly), explode the deficit, raise mortgage rates, lower stock and bond prices, and eventually overheat the economy and throw us into recession.

It would also provide a much bigger benefit to the well-to-do than to the average working family — not just in absolute dollars but proportionally.

I got a lot of good mail from you, both pro and con, almost all of it civil and intelligent. (Hey: this is a great country!) Here’s one example. I don’t know whether the “equal time” doctrine applies to this web site (well, I do know: it doesn’t), but in that spirit:

Mr. Tobias,

I’m sure that after your comments of the past few days, you’ve gotten pounded by lots of angry Republicans. I’m one (Republican) and I’m not (angry). But I hope you take the time to read this, because I felt the need to join the howling and reply.

Your comments truly disturbed me, but by doing so they made me think. I guess in a way I need to thank you for that. I’ll say up front I’ve been a strong Dole supporter, even going back to when Bush was President. On the other hand, I agree with much of what you said.

Let me try to present my position:

a) The government creates neither jobs nor prosperity. All the government can do is create an ENVIRONMENT conducive to them.

I give credit for the current state of the economy to the technology boom, for dramatically increasing productivity by providing businesses with the most dramatically productivity-enhancing tools in 100 years. And to Alan Greenspan for keeping the economy on keel, and skillfully keeping us out of recession. Bill Clinton has been lucky enough to be in the right place at the right time.¹

b) You imply simple choices where they do not exist. The strengths of your books is that they simplify complex subjects, and they do it for subjects (personal finance) where it is POSSIBLE to simplify. There is no arguing with the fact that you should not borrow at 5% to lend at 3%. But I argue that in this (or any) election, things are not so simple.²

Please re-read your book “Auto Insurance Alert” and then look at Mr. Clinton’s campaign contributions and voting record. I believe you might find yourself with a bit of cognitive dissonance (if not, let me give you a hint — LAWYERS). Weren’t you yourself involved with Tom Proulx and the anti-lawyer initiatives in California?³

Do I choose the NRA over the NEA? The Christian Coalition over the Rainbow Coalition? The tobacco lobby over the trial lawyers? No. I won’t side with ANY of them. I hate the fact that our political system forces our candidates to do so. My point is that you are doing a disservice to society by using your influence and pulpit to forward the stance that the choice in November is a simple choice of a tax cut vs. fiscal responsibility. It is anything but.

And last, but to me, the most important point of all…

c) You take Bob Dole to task for embracing a tax cut in which he does not believe. I think that you’re correct on both counts – the tax cut is not well thought-out (although I do support tax reduction and spending cuts) and Mr. Dole does not truly believe in it.

But Bill Clinton FORCED this, by adopting a pseudo-Republican stance to get re-elected. The man who embraced socialized health care two years ago suddenly is signing the recent Welfare Reform Bill? And that’s NOT hypocritical? Bill Clinton the moderate is a crock.⁴ Mr. Clinton showed his true stripes during his first two years in office, and was spanked for it in ’94. Mr. Dole’s track record, on the other hand, is imperfect (aren’t we all) but consistent, admirable, and MODERATE!

Let me be direct. My opinion of Bill Clinton is lower than whale poop. In my opinion, he will do ANYTHING to get elected. Whitewater, TravelGate, and all the other garbage he, his wife and his cronies are involved in show a complete lack of character. He’s been “getting away with it” for years and people (including you, I believe) know it, but allow his behavior to continue because he’s a charming speaker.⁵

Bob Dole, on the other hand, is a principled, decent man who lacks Mr. Clinton’s smooth delivery but outclasses him by miles in terms of possessing true character. He has devoted his life to government service, and has served this country tremendously well for many, many years.

I invite your response, and I hope it makes you think a little before you suggest that this November’s choice is a simple one.

Regards,

Chris

¹Chris is right that the technology boom and Mr. Greenspan are both big plusses. But both were also big plusses throughout Mr. Bush’s four years. (Greenspan became chairman in 1987.) Clinton didn’t just stick with the status quo and get lucky; he changed course. He raised taxes on the top 1% (while lowering taxes on the working poor) to shrink the deficit, lower interest rates, and get the economy moving. Since then, 10 million new jobs have been added, the federal payroll has been trimmed by more than 200,000, and the deficit has been cut by more than half. A reasonable start has been made at “reinventing government” and cutting red tape. I don’t agree he was just “in the right place at the right time.”

²Chris is also right that many of the issues we face are not simple. But the November choice is simply: Dole or Clinton. And in several key areas, they and their parties espouse very different views. I guess if you buy my economic arguments but hate Clinton’s social policies (or vice versa), it’s a tough choice. But I was addressing mainly the economic stuff.

³Yes, I was involved in the California ballot initiatives (though I saw them more as “pro-consumer” than “anti-lawyer”). Indeed, the current WORTH Magazine has my account of that effort (titled — despite my admiration for much that he’s done — “Ralph Nader Is a Big Fat Idiot”). Plug, plug. But while there’s little question that Democrats are predisposed to trial-lawyer positions, some of which I think are terrible, the President recently came out against lawyer Bill Lerach’s current California ballot measure, Prop 211 — which is exactly what I believe he should have done. But, yes, if the only issue being decided in November were tort reform, I’d be torn. I think on that issue Dole might go too far and Clinton not far enough.

⁴Actually, Clinton was chairman of the Democratic Leadership Council before running for President. The DLC is assailed by liberal Democrats as being all but Republican. I think Clinton’s moderate, practical, progressive approach long predates 1994. And the Clinton health plan bent over backwards (rightly or wrongly) not to be socialist, unless by that you mean that everyone would have been covered (as they are, I believe, in every other major industrialized nation).

⁵My own view is that the Clintons have gotten a terrible bum rap on this. Not that they’re perfect, or there haven’t been times when they’ve been too defensive. But I think history will conclude that “Whitewater” and “Travelgate” were nothing, or next to nothing, and that on issues that go to the well-being of the nation and the world — education, free trade, employment, health care, crime, human rights, world peace, and so on — they have worked incredibly hard and honorably.

I agree Bob Dole is a fine man and a moderate.

Tomorrow: Your Child’s IRA

“I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go.” — Jack Benny (quoted in Janet Bamford’s forthcoming Smarter Insurance Solutions)

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To me, Public Citizen is one of the basic “good guy” groups, along with Norman Lear’s People for the American Way, the American Civil Liberties Union, Common Cause, Planned Parenthood, Amnesty International — all that. I was a charter member.

But it’s precisely because I think of Public Citizen as being among the good guys that I was troubled by its latest solicitation.

For starters, the address on the envelope has a goofy computer-generated font designed to make me think the it was hand-addressed. And the envelope says: “Registered Document Enclosed,” even though there isn’t, in any meaningful sense, a registered document enclosed.

I don’t find either of these things terrible — all the junk mailers do it, and I guess Public Citizen feels it has to, too. (But why couldn’t the envelope have just been straightforward? “Big Tobacco is buying Congress, and YOU can help stop it! Please open immediately!”)

No, what got me wasn’t their attempt to fool me into thinking this was an important personal letter. And I certainly wasn’t offended by the goal of the mailing — to urge legislators to stop accepting tobacco money.

What got me was this passage:

“[In return for campaign contributions], Congress continues to protect the tobacco industry’s corporate welfare benefits. Did you know that this $60-billion industry is able to deduct the cost of their cigarette advertisements from their taxes? — a subsidy financed through higher taxes on you, me, and every American citizen. That means you’re helping to pay for all those ‘Joe Camel’ ads aimed at kids.”

Now, please. This is such blatant demagoguery. It suggests that tobacco advertising somehow gets a break other advertising doesn’t. But of course ANY advertising to sell ANY product is considered a deductible business expense. It doesn’t matter whether it’s tobacco, toothpaste, or machine tools.

To suggest that it’s a “subsidy” to allow businesses to deduct costs before figuring profits displays a fundamental misunderstanding of economics — or, more likely, I fear, a callous disregard for honest discourse.

I’ve long advocated that all tobacco advertising be banned. I can make a good case for that, my ACLU membership notwithstanding. And I’d be happy to see, as a modest step in that direction, a law that did single out tobacco advertising and keep it from being counted in figuring a company’s taxable profits.

But this letter didn’t make those cases. Instead, it served to mislead the average recipient. Demagoguery shouldn’t be a Public Citizen tactic.

The irony is that Public Citizen’s founder, Ralph Nader, who remains very much its guiding light, is running for president against the first president in the history of the United States who has taken a tough stand against the tobacco industry.

Obviously, he has no chance of winning. And right now, it looks as if he’ll have no impact whatever. But when Nader first declared his candidacy, there was the slim but real prospect he could tip California — and thus the entire election — to Dole. If something truly unexpected happened between now and Election Day to narrow the race, he still might. In that case, inasmuch as Dole is a friend of Big Tobacco and Clinton is its worst nightmare, Public Citizen founder Ralph Nader would prove to have been (unintentionally, to be sure) the best friend Big Tobacco ever had.

Tomorrow: Jack Benny’s Life Insurance