| Sargent & Lundy Savings Investment Plan |
| YOUR INVESTMENT POLICY |
| The following excerpts are from the
Spring 1996 "Personal Financial Planning", a
newsletter prepared by Arthur Andersen. The opinions
expressed may or may not reflect those of the SIP
Committee. The process of developing a strategic investment policy begins with a review of your goals and future financial needs, including the amount of income you will need in retirement. It also involves careful consideration of your risk tolerance and return expectations. Because of the rules regarding access to 401(k) assets, you should always view these funds as a long-term investment. While many plans now allow loans, and even though the interest paid on such loans essentially is paid to yourself, you should carefully consider the impact of a loan on your overall asset allocation. If possible, the loan should be taken from the fixed-income portion of your account. Otherwise, there may be an opportunity cost if you have a loan outstanding during an upward burst in the market, such a experienced in 1995. No matter what their retirement income needs, for most people, it is desirable to contribute the maximum amount allowed into their 401(k) account, although "highly compensated" employees (as defined by IRS) and executives in some companies may be limited under current law to lower contributions based on contributions make by "nonhighly compensated" employees. If you are closer to retirement and have accumulated substantial assets in all of your retirement plans combined (IRAs, all qualified and nonqualified plans), you may be subject to the 15% "success" excise tax on excess distributions (while you are living) or excess accumulations (after you die). You should check with your tax advisor and, if you are subject to the excise tax, weight the current and future tax implications and adjust your contribution level accordingly. As part of your investment planning, you will determine an optimal asset allocation for the retirement portion of your investment portfolio. If your asset allocation includes both fixed-income and equity investments, your investment policy may provide some guidelines on which asset class(es) will be represented within and outside your plan. EVALUATE THE FUNDS AVAILABLE TO YOU. Use the same criteria you use for selecting outside funds to evaluate any investment options in your 401(k) plan that fall within the asset classes specified by your investment policy. Specifically, look at factors such as the manager's tenure; adherence to the stated style over time; risk-adjusted performance over a three- or five-year time period compared to the peer group; and expense ratios. If a fund within the 401(k) plan does not meet your criteria, check your spouse's plan to see if a fund closer to your standards is available. Many mutual-fund families often remove any "loads" or sales charges when a traditional load fund is offered in a 401(k) plan. When these are otherwise excellent investment alternatives - as judged by your evaluation criteria - you might want to consider them for your 401(k) account, particularly when you invest on a regular basis through payroll deductions. DIVERSIFY YOUR COMPANY-STOCK HOLDINGS. Although most plans have diversified their investment alternatives, many still offer company stock as an alternative in their 401(k) plans and some use only company stock to match employer contributions. Employees and executives who hold a significant number of shares of company stock or substantial stock options generally should not consider this option for their 401(k) accounts, or they should look at some of the more sophisticated strategies for diversifying company-stock holdings. TAKE ADVANTAGE OF TAX-DEFERRED GROWTH. Everyone knows that in addition to offering the opportunity to shelter contributions from current income taxes, 401(k) plans from the plan, including capital gains, are taxed as ordinary income when received. If your asset allocation includes a percentage of fixed-income investments or high dividend paying stocks, and your plan includes fixed-income or equity-income options that you consider attractive, you may want to consider this part of your portfolio for your 401(k) account to take advantage of tax deferral on the income. It also makes sense to use your 401(k) plan for investing in funds that have high turnover and substantial short-term capital gains, where this income can be reinvested without paying taxes. REVIEWING AND REBALANCING YOUR 401(k). Many plans today offer sophisticated voice-response telephone systems through which you can manage your account; many enable you to obtain the value of your account and\or switch funds daily. It may be tempting to switch among the funds in your 401(k) account more frequently because it can be done without any direct tax or cost consequences. These features make it very tempting to try to time the market, but it is important that your take a strategic approach to any changes (increasing the percentage of equities in your account just because the market had a good bounce that day is not a strategic approach). Try to coordinate a review of your 401(k) account in conjunction with a periodic (preferably annual) review of your broader retirement portfolio. When evaluating fund performance, compare each fund to its relevant benchmark and\or peer group. Make note of any changes in the manager or the fun's style. Is the fund sticking to its stated style over time? It is maintaining a three or five-year performance level that is comparable to or better than the average for its peer group? Rebalancing essentially involves assessing your current portfolio and comparing it to the optimal allocation stated in your investment policy. Unless any significant changes have occurred to your personal situation or goals that warrant a change in your target allocation, you will want to make strategic adjustments to your portfolio to bring it back in line with your investment policy. If you are moving assets into a new investment choice, consider whether to invest all the funds at once or whether to use a dollar-cost-averaging strategy. Under a dollar-cost-averaging strategy, the funds might be held in the plan's money-market fund, then invested into the chosen equity or fixed-income funds a little bit at a time. While this strategy usually will produce a somewhat lower return over a long-term timeframe, it is a good way to control risk. Most of the decisions you make about your 401(k) investments will flow from a carefully crafted investment policy that sets the guidelines for all of your retirement investments. By viewing your 401(k) account as an integral part of your overall strategic investment plan, you can maximize its effectiveness as a long-term investment tool and a key element of your retirement income equation. |
This page updated on 9/22/97