Good match offsets expenses in 401(k) plan | Scott Burns
How a company match can help counter high expenses, and a close look at the meaning and meaningless of market-capitalization numbers.
Q: My husband’s company has a SIMPLEIRA plan in place for employees. We are evaluating whether it is “worth it” for our retirement savings, given the tax break.
Facts: He is 65 years old. Our household income is about $110,000. The company caps the contribution at 3 percent of salary, which is about $2,500 for us.
The plan’s investment mix is with Goldman Sachs, and there are load fees and rather high expenses. I have calculated that the projected realized gain will be minimal on a maximum contribution of $14,000 after sales charge and expenses are deducted.
Will the tax break created by the $14,000 contribution to the plan outweigh the small gain? We are in a 25 percent tax bracket and have very few deductible expenses.
A: Without the 3 percent match, this would be a plan to avoid due to the expenses and front-end sales charges.
You might also check that you understand the plan because commissions are very rare for 401(k) plans these days. That said, the match would overpower commissions and expenses.
Another benefit is that you will likely retire to a 15 percent tax bracket, so you’ll avoid 25 percent now in favor of 15 percent later.
Bottom line: Grind your teeth about an unfavorable plan, but do it. Do a rollover from the 401(k) plan on Day 1 of retirement.
Q: Could you help me out with understanding market caps? Is the market cap important in analyzing a stock’s value?
A: Market capitalization — the total market value of a publicly listed company’s shares — has some use in itself, but greater utility when used with another metric such as total sales, total profits or total debt.
By itself, market capitalization can be a “gee whiz” number. Exxon, for instance, was recently worth $377 billion, while Apple was worth $440 billion. Both companies top the market capitalization list and are called “megacaps.”
The primary concern with most analysts for companies that large is whether they can do anything to “move the needle” of company earnings.
Two researchers, Eugene Fama and Kenneth French, have found that small capitalization companies as a group have higher long-term returns than large capitalization companies.
Combining market capitalization with another metric, such as earnings, can tell you a lot about the relative pricing of a company. Amazon.com, for instance, has a market capitalization of $170 billion and a price-to-earnings ratio of 628.
This is an extraordinary multiple of its profitability. A conventional retailer like Target, however, has a market capitalization of $39 billion and a price-to-earnings ratio of 20.
Comparing the metrics of different stocks, in the same industry or across the board, is how analysts like to find relative bargains. Sometimes they are right. But research has shown that most of the time they are wrong.
Copyright 2014, Universal Press Syndicate