Many employers provide 401K matching That is, once an employeehas been with the firm for a sufficient period (often one year),the firm will match the employeeâs contributions to the firmâsavailable 401K plan up to a certain percentage. Assume that anemployee has just become eligible for the firmâs matching plan. Inthis case, the firm will match the employeeâs investments up to 6%of the employeeâs salary. (If the employee contributes 1%, thecompany puts in 1%, likewise up through 6%. If the employee puts inmore than 6%, the companyâs contribution remains at 6% of thesalary.) If the 401K investment plan currently has earned anaverage of 5% per year for the past 5 years, consider thefollowing:
What percentage of their salary should this employee invest inthe 401K if they believe that they can earn 8% per year in an ETF(exchange-traded fund)? How does the current investment environmentaffect this employeeâs decision? What might be circumstances youcan envision that might change the employeeâs investment decisions?Use the time value of money concepts that you have learned in thisclass to help you consider this problem. Be sure to consider thebenefits and risks of investments in general and those for thisexample in particular. If you decide to use numeric examples, besure to state your assumptions.
Note: 401K and similar plans allow employees to invest pre-taxfunds as savings for their retirement. Taxes are paid when thefunds are withdrawn during retirement, with steep penalties forearly withdrawal of funds. âRegularâ investments are made withafter-tax funds.
Many employers provide 401K matching That is, once an employeehas been with the firm for a sufficient period (often one year),the firm will match the employeeâs contributions to the firmâsavailable 401K plan up to a certain percentage. Assume that anemployee has just become eligible for the firmâs matching plan. Inthis case, the firm will match the employeeâs investments up to 6%of the employeeâs salary. (If the employee contributes 1%, thecompany puts in 1%, likewise up through 6%. If the employee puts inmore than 6%, the companyâs contribution remains at 6% of thesalary.) If the 401K investment plan currently has earned anaverage of 5% per year for the past 5 years, consider thefollowing:
What percentage of their salary should this employee invest inthe 401K if they believe that they can earn 8% per year in an ETF(exchange-traded fund)? How does the current investment environmentaffect this employeeâs decision? What might be circumstances youcan envision that might change the employeeâs investment decisions?Use the time value of money concepts that you have learned in thisclass to help you consider this problem. Be sure to consider thebenefits and risks of investments in general and those for thisexample in particular. If you decide to use numeric examples, besure to state your assumptions.
Note: 401K and similar plans allow employees to invest pre-taxfunds as savings for their retirement. Taxes are paid when thefunds are withdrawn during retirement, with steep penalties forearly withdrawal of funds. âRegularâ investments are made withafter-tax funds.
