A Job at S\&S Alr You recently graduated from college, and your job search led you to S\&5 Air. Because you felt the compary's business was headed skyward, you accepted the job offer. As you are finishing your emptoyment paperwork, Chris Guthne, who works 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 pian offered by many companies. A 401(k) is tax deforred, which meani that any deposits you make into the plan are deducted from your curfent income, so no curfent taxes are paid on the money A stume your salary will be $40.000 per year if you contribute $3.000 to the 401(k) plan. you will pay taxes only on $97,000 in income. No taxes will be dive on any capital gains or plan income whice you are inversted in the plan, but you will pay taxes when you withdraw the money at retirement. You can contribute up to 15 percent of your salary to the plan. As is common, SES Air also has a 5 percent match program. This means that the company will match your contribution dollar-for-dollar up to 5 percent of your salary, but you must contribute to get the match. The 401(k) pian has several options for investments, most of which are mutual funds. As you know, a mutual fund is a portfolio of assets. When you purchase shares in a mutual fund, you are actually purchasing partial ownership of the fund's assets, similar to purchasing shares of stock in a company. The return of the fund is the weighted average of the return of the assets owned by the fund, minus any expenses. The largest expense is typically the management fee paid to the fund menager, who makes all of the imvestment decisions for the fund S\&S Air uses Arias Financial Services as its 401(k) plan administrator: Chris Guthrie then expiains that the retirement investment options offered for employees are as follows: 1. Company stock. One option is stock in S\&S Alr. The company is cumently privately held. The price you would pay for the stock is based on an annual appraisal, less a 20 percent discount. When you interviewed with the owners. Mark Sexton and Todd Story, thery informed you that the company stock was expected to be publicly soid in three to five years. If you needed to sell the stock before it became publicly traced, the company would buy it bock 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 same as they are in the S\&P 500 . This means that the fund's return is approximately the return of the S\&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund 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 ptimarily invests in small capitalization stocks. As such, the returns of the fund are more volatile. The fund aiso can invest 10 percent of its assets in companies based outside the United States. This fund charges 1.70 percent of assets in expenses per year. 4. Arias Large-Company Stock Fund. This fund invests primarify in large capitalization stocks of companies based in the United States. The fund is managed by Melissa Arias and has outperformed the market in six of the fast eight years. 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 is restricted to imvestments in bonds with an investment grade credit rating. This fund charges 1.40 percent in expenses. 6. Arias Money Market Fund. This fund invests in short-term, high-credit-quality debt instruments, which include Treasury 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 negative return. The fund charges. 60 percent in expenses. QUESTIONS 1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing? 2. Notice that, for every dollar you invest, S\&S Air also invests a dollar. What return on your investment does this represent? What does your answer suggest about matching programs? 3. Assume you decide you should invest at least part of your money in large capitalization stocks of companies based in the United States. What are the advantages and disadvantages of choosing the Arias Large-Company Stock Fund compared to the Arias S\&P 500 Index Fund? 4. The returns of the Arias Small-Cap Fund are the most volatile of all the mutual funds offered in the 401(k) plan. Why would you ever want to invest in this fund? When you examine the expenses of the mutual funds, you will notice that this fund also has the highest expenses. Will this affect your decision to invest in this fund