Case Study K: Eileen Ponders Mutual Funds

Eileen Moriarty is the director of a major charitable organization in Burlington, Vermont. A single mother of one young child, she earns what could best be described as a modest income. Because charitable organizations arent known for their generous retirement programs, Eileen has decided it would be best for her to do a little investing on her own. Shed like to set up a program to supplement her employers retirement program and, at the same time, provide some funds for her childs college education (which is still 12 years away). Although her income is modest, Eileen believes that with careful planning, she could probably invest about $250 a quarter, and she hopes to increase this amount over time. Eileen now has about $15,000 in a bank savings account, which shes willing to use to kick off this program. In view of her investment objectives, she isnt interested in taking a lot of risk. Because her knowledge of investments extends no further than savings accounts, she approaches you for some investment advice.

Critical Thinking Questions

Explain to Eileen the key reasons for purchasing mutual fund or ETF shares.

What types of mutual funds or ETFs would you recommend to Eileen?

Explain to Eileen the selection process for making mutual fund and EFT investments.

Do you think some type of real estate investment would make sense for Eileen? If so, what type would you suggest? Explain.

Case Study L: Sarahs Job Offers

Sarah Wood has just graduated from college and is considering job offers from two companies. Although the salary and insurance benefits are similar, the retirement benefits are not. Both employers have defined contribution plans and employees are free to direct how their plans are invested, but that is where the similarities end. Alpha Company contributes 3% of an employees annual salary. Employees are vested after three years using cliff vesting and it is not possible for employees to voluntarily supplement their contributions. Beta Corporation only contributes a match to an employees contribution. The match is 50% of the employees contribution up to 3%. Therefore, if an employee contributes 6% of their annual salary, Beta Corporation will contribute another 3%. Vesting in Beta Corporation happens over a graded schedule. Sarah is confused an unsure what to do so she turns to you for some advice.

Critical Thinking Questions:

Regarding vesting requirements, what is the difference between cliff vesting and vesting over a graded schedule?

Which pension plan would offer Sarah the greatest long-term potential? Explain your answer.