401K Advice

[tshane123]

I just graduated college (22 years old) and start my first full time position. The company I'm working for offers both a 401K plan through Fidelity and a pension.

Currently I'm investing 15% of my salary plus the 7% the company matches in my 401K (22% total). I have it spread out into 15% bonds, 30% in the company stock (would be considered large cap), and then the other 55% in stocks. I have my stocks spread out so i have 20% in mid cap, 20% small cap, and 15% international. Since I'm very young I feel it is best to have my money invested in higher risk stocks.

The question I have now is should I look into investing more money into my 401k or a roth IRA if I have extra funds? I doubt I will have this issue because I plan to start saving for a down payment on a house.

Let me know what you think of my current distribution of my investments. Please give me any advice b/c I'm really just learning as I go.

[jIM_Ohio]

Two constructive comments-

I would put extra money into a Roth IRA, unless your salary is really high (greater than $78,850 single).

I would look to increase your large cap exposure a little. 30% company stock is a bold move, I would either reduce this and add exposure to a large cap fund, or put 10% large cap-10% mid-10% small and 25% international.

Others will tell you to not use company stock at all, but I counter that with risk-reward. Company stock is a GREAT way to attempt to get above market returns. Just realize if your company falls on hard times it could cost you a good chunk of your retirement (30% the way you have it aligned).

I invest 4% of my 401k into my company stock (large cap)
My wife invests 5% of her 401k into her company stock (also a large cap).

Those small allocations can net a large dollar return (the goal would be a 20% type return on about 5% of the 401k balance, which would equal the risk adjusted return dollar wise on an 8% return with a 40% balance). If 100k is 401k value, 5% to company stock is 5k, 20% return is $1000. 40% large cap is $40,000, 8% return is $3200. Based on the risks, I think the dollar gain in each case is appropriate- for ME)

The 15% 401k contribution will do wonders for you- 10 years from now you will be thankful you made that decision, and you will probably have a large account balance to show for it.

[noppenbd]

The reason most would advise against company stock is that you are doubling down on your company. If your company falls on hard times you could not only lose the 30% in your 401k but you could also lose your job at the same time. Not a good scenario. Unless you are getting the company stock at a big discount I would reduce my exposure in the 401k. There are other ways to accelerate your growth which do not correlate with your job. For instance you could do sector rotation or make specific stock bets in your Roth IRA (not that I really advise these either).

[dfourss]

I agree that 30% in company stock is risky. And I don't care how solid your company is. My husband worked for Eastman Kodak. You would think it would be safe. WRONG! Fortunately my husband did NOT invest in EK stock.

Big KUDOS to you for putting so much in your 401K. Not many young people are smart enough to do that.

I would suggest taking some of that 30% and putting more into international. Considering the current state of the US economy, you'll get better returns on international.

Lastly, if you don't already, I would investigate getting a financial advisor. If you have extra funds to invest, a certified financial advisor can help you. Will also advise on your 401K allocation.

[cashing_in]

It is rue that if you are not working with any big 4 then it is very risky to invest more than 3-4% on company stocks.
It is better to invest in Roth IRA with a balanced fund approach.
It is better to seek the advice of a professional accountant or a bookkeeper in this regard.

cheers,

[scottie1]

Contribute to your 401k up to the company match. Then contribute the max to a Roth ($5k) if you qualify. Then contribute any extra to your 401k. If you do not qualify for the Roth, contribute the $5k to a non-deductible IRA. Starting in 2010 anyone, regardless of income, can convert an IRA to a Roth IRA. You said you wanted to save for a down payment on a first home. Someone can correct me if I'm wrong but I believe you can withdraw from the Roth for the purchase of your first home without penalty.

[zetta]

I would agree about reducing the company stock to 5%, and change the other 25% to a large-cap fund.

At the age of 22, I would even consider reducing bonds to 10%

Someone can correct me if I'm wrong but I believe you can withdraw from the Roth for the purchase of your first home without penalty.

You can, but I would recommend the OP not plan on doing this. Instead, contribute the max to the ROTH, and save toward the downpayment outside of the retirement accounts.

[Exile]

I suggest that you invest no more than 10% of your 401(k) money in company stock. I made the mistake of placing just a small percentage of my401(k) funds into my employer's stock. I kept my 401k after I retired (which of course is not your situation, but bear with me.) Shortly after that, the company stock proceeded to decline. Out of a misplaced sense of loyalty I held onto it, thinking that it might recover. That never happened, and as a result, it affected the performance of my entire portfolio.

Of course, a decrease in value can happen to any investment. But when it happens to company stock, it's as though your employer is paying you with one hand and taking back the money with the other.

A final word about 401(k): on a positive note, if you're an hourly employee, working overtime can be a good investment beyond an increase in your paycheck. If you contribute to your investment fund based on a percentage of your salary, overtime premium pay will increase the pot. If your employer matches your contribution, that's free gravy on your mashed potatoes, and if your 401(k) performs well, your earnings down the line will accelerate accordingly.

[tshane123]

More background info

I guess I should have elaborated a little more on the type of job I have. I'm currently working in the oil industry as an engineer for bp. I think I will take your advice and decrease the amount of money I'm putting into my company stock. Especially with how unpredictable the oil market is and is probably going to be for a long time.