What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing? A Job at S&S AirYou recently graduated from college, and your job search led you to S&S Air. Because you felt the company's businesswas headed skyward, you accepted the job offer. As you are finishing your employment paperwork, Chris Guthrie, whoworks in the finance department, stops by to inform you about the company's new 401(k) plan.A 401(k) is a type of retirement plan offered by many companies. A 401(k) is tax deferred, which means that anydeposits you make into the plan are deducted from your current income, so no current taxes are paid on the money.Assume your salary will be $40,000 per year. If you contribute $3,000 to the 401(k) plan, you will pay taxes only on$37,000 in income. No taxes will be due on any capital gains or plan income while you are invested in the plan, butyou will pay taxes when you withdraw the money at retirement. You can contribute up to 15 percent of your salary tothe plan. As is common, S&S Air also has a 5 percent match program. This means that the company will match yourcontribution dollar-for-dollar up to 5 percent of your salary, but you must contribute to get the match.The 401(k) plan has several options for investments, most of which are mutual funds. As you know, a mutual fund is aportfolio of assets. When you purchase shares in a mutual fund, you are actually purchasing partial ownership of thefund's assets, similar to purchasing shares of stock in a company. The return of the fund is the weighted average of thereturn of the assets owned by the fund, minus any expenses. The largest expense is typically the management feepaid to the fund manager, who makes all of the investment decisions for the fund. S&S Air uses Arias FinancialServices as its 401(k) plan administrator.Chris Guthrie then explains that the retirement investment options offered for employees are as follows:1. Company stock. One option is stock in S&S Air. The company is currently privately held. The price you would pay forthe stock is based on an annual appraisal, less a 20 percent discount. When you interviewed with the owners, MarkSexton and Todd Story, they informed you that the company stock was expected to be publicly sold in three to fiveyears. If you needed to sell the stock before it became publicly traded, the company would buy it back at the then-current appraised value.2. Arias S&P 500 Index Fund. This mutual fund tracks the S&P 500. Stocks in the fund are weighted exactly the sameas they are in the S&P 500. This means that the fund's return is approximately the return of the S&P 500, minusexpenses. With an index fund, the manager is not required to research stocks and make investment decisions, sofund expenses are usually low. The Arias S&P 500 Index Fund charges expenses of .20 percent of assets per year.3. Arias Small-Cap Fund. This fund primarily invests in small-capitalization stocks. As such, the returns of the fund aremore volatile. The fund also can invest 10 percent of its assets in companies based outside the United States. Thisfund charges 1.70 percent of assets in expenses per year.4. Arias Large-Company Stock Fund. This fund invests primarily in large-capitalization stocks of companies based inthe United States. The fund is managed by Melissa Arias and has outperformed the market in six of the last eightyears. The fund charges 1.50 percent in expenses.5. Arias Bond Fund. This fund invests in long-term corporate bonds issued by U.S.-domiciled companies. The fund isrestricted to investments in bonds with an investment-grade credit rating. This fund charges 1.40 percent inexpenses.6. Arias Money Market Fund. This fund invests in short-term, high-credit-quality debt instruments, which includeTreasury bills. As such, the return on money market funds is only slightly higher than the return on Treasury bills.Because of the credit quality and short-term nature of the investments, there is only a very slight risk of negativereturn. The fund charges .60 percent in expenses.

Let us first understand what mutual funds are.Essentially mutual funds are pool of money that is…

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What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter11: Long-term Assets

Section: Chapter Questions

Problem 1TP: You are an accounting student at your local university. Your brother has recently managed to save...

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