Losing a job means making choices about your 401(k) plan PERSONAL FINANCE



Letters from readers sometimes raise questions on topics of general interest. Here's one:

* "I lost my job in June and am still unemployed. The company allowed me to keep my 401(k) plan with them but not to make additional contributions.

"The amount I had saved is $25,000 (pre-tax). As of June, I had changed my allocation to 80 percent Standard & Poor's 500 Index fund, 10 per cent growth stock fund and 10 percent company stock.

"Is it good to invest such a large percentage with the S&P 500? I am 34 years old and have many years before I can touch this money."

Given the probability that you have only a limited time within which you can act, it's important to decide whether you should leave money in a past employer's plan for many years -- 31, in this case -- or move it before you consider the investment options.

The decision depends primarily on the ease with which a former employee can change his investment mix. Fees also may be a factor.

If your flexibility is limited and you can't have access to the money until you're 65, you're probably better off taking it out, Richard Koski, a benefits consultant at Buck Consultants, advises.

If you want to keep the money working for you sheltered from tax, you have two attractive options: rolling it over into an individual retirement account (IRA) or into your next employer's 401(k) plan.

If you've decided on an IRA -- perhaps because you don't yet have a job -- be sure to set up one or more separate rollover accounts, Koski cautions. Mingling the money with an ordinary IRA would complicate your life if you want later to roll it over into an employer's plan.

In either case, you have to deal with your former employer's stock. You can sell it and roll over the proceeds along with the rest of the account. Alternatively, as Koski points out, you can split the account, taking possession of the stock (but incurring some tax costs) and holding it outside an IRA while moving only the balance.

Whether you stay in a plan or move, the answer to the question of whether 80 percent is too large a share of a nest egg to have in an S&P 500 Index-linked fund depends largely on the other equity funds or portfolios available to you.

For the last 10 years, the Vanguard 500 Portfolio, oldest of the mutual funds managed to track the index, ranked 63rd of 385 equity funds, according to Lipper Analytical Services. It was 257th of 854 for the last five years and 642nd of 1,383 for 1992.

Because a large majority of managed funds have tended to lag the index over time, an S&P 500 Index fund would seem to constitute a sensible core holding for the long run. But, as the table indicates, small company stocks and value stocks have beaten the index at times.

Therefore, it might be rewarding to invest less in an index fund and commit some money to a couple of well-managed funds that are concentrated in such stocks. For rollover IRA accounts, you can find a number of funds to choose from. If an employer isn't yet making them available for your 401(k) plan, you will have to wait until he offers more options, as quite a few are doing.

Here's another letter:

* "In 1986 I purchased a number of shares in American Capital Pace. The fund had an excellent 10-year record at the time. However, since I purchased them they have not increased in value."

The reader may be correct in saying that his shares have not increased in value, but he's apparently overlooking something important: income dividends and capital gains distributions.

It's not clear when in 1986 he bought the shares, but it's possible that the offering price at the time, including a 5.75 percent sales load and adjusted for a subsequent 2-for-1 split, could have been close to the $12.25 closing net asset value for 1992.

If he now owns only twice the number he originally bought (reflecting the split), it's clear that he has been taking dividends and capital gains distributions in cash instead of reinvesting them.

Assuming the distributions were reinvested in additional shares, American Capital figured the fund had an average annual total return (adjusted for the load) of 10.3 percent for the last six years and 12 percent for the last five -- hardly flat but below average.

To improve its performance, Alan Sachtleben, head of American Capital's equity department, took over as portfolio manager last June and has replaced stocks of large companies constituting 10 percent of the fund's assets with shares of small and medium-size companies.

And here's one more letter:

* "Please explain capital gains. Does it mean the gains that your capital makes after dividends are added to it?"

For mutual fund investors, there are two kinds of capital gains on which income tax must be paid.

One is the capital gain a fund realizes when its manager sells portfolio securities for more than they cost. It distributes your share of net capital gains to you once or twice a year.

The other is the gain you realize when you sell a fund's shares for more than they cost you. For this calculation, you want to be certain to include not only the cost of shares you bought when you invested but also the cost of those that were bought for you with the reinvestment of dividends and capital gains distributions.

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