The Financial Advisor's Investment Case Retirement Plans and Investment Choices 2016 1.1 09 40 12 Ken Saffat's 22-year-old daughter Bozena has on the average of his salary for the last five years in jot accepted a job with Doctor Medical Systems which he works. Since the employer guarantees and (DMS), a firm specializing in computer services funds the plan, Ken does not understand Bozena's for doctors. DMS offers employees a 401(k) plan c hoices. He believes that she should participate bu to which employees may contribute 5 percent of does not know the advantages and risks associated their salary. DMS will match 50.50 for every dol- with each choice. Since Ken is your cousin, he has lar contributed. Bozena's starting salary is $32,000, asked you to answer the following questions to so she could contribute up to $1,600 and DMS convince Bozena to participate in the 401(k) plan would contribute an additional 5800. If she did and to help her choose among the six alternative decide to contribute to the plan, she has the fol- funds. owing choices of funds, all managed by Superior investments. She may select any combination of the Standard unds and change the selection quarterly. Deviation Return of Return Beta U.S. Value Fund-a fund invested solely in a. USVF 13% stocks of U.S. firms that management believes b. RTF 12 to be undervalued GE 15 0.6 Research & Technology Fund -a fund sped GBF 7 0.3 cializing in stocks of companies or firms pri e HYD 10 03 marily emphasizing computer services and MF 4 0.0 0.0 programming 1. If Bozena participates and the 401(k) carns | Global Equities- fund invested solely in 10 percent annually, how much will she have stocks of firms with international operations, accumulated in 45 years (to age 67) even if her such as Sony salary does not change? Government Bond Fund-a fund devoted 2. If she does not participate and annually saves to debt issued or guaranteed by the federal $1,600 on her own, how much will she have government accumulated if she earns 10 percent (before High-Yield Debt-a fund devoted to bonds tax) and is in the 20 percent federal income with non-investment grade ratings tax bracket? Money Fund fund investing solely in short 3. If she retires at age 67, given the amounts in term money market instruments (1) and (2), how much can Bozena withdraw and spend each year for 20 years from each The historic returns of each fund, the standard alternative? Assume she continues to earn viation of the returns, the fund's beta (computed 10 percent (before tax) and remains in the ative to the S&P 500 stock index), and the R2 of 20 percent federal income tax bracket. ta are provided in the table. Ken's employer offers a defined benefit pen. 4. If her salary grows, what impact will the in in plan in which his retirement income depends crease have on the 401(k) plan? To illustrate the effect on her accumulated funds, assume a $5,000 increment every five years so that she is earning $72,000 in years 41-45 (ages 63-67). 5. What are the risks and potential returns asso- ciated with each of the six alternative funds? 6. Who bears the risk associated with Bozena's retirement income? 7. Why does Ken not have to make these invest ment decisions? What are the risks associates with his retirement plan? 8. At this point in Bozena's life, which alter native(s) do you suggest she select The Financial Advisor's Investment Case Retirement Plans and Investment Choices 2016 1.1 09 40 12 Ken Saffat's 22-year-old daughter Bozena has on the average of his salary for the last five years in jot accepted a job with Doctor Medical Systems which he works. Since the employer guarantees and (DMS), a firm specializing in computer services funds the plan, Ken does not understand Bozena's for doctors. DMS offers employees a 401(k) plan c hoices. He believes that she should participate bu to which employees may contribute 5 percent of does not know the advantages and risks associated their salary. DMS will match 50.50 for every dol- with each choice. Since Ken is your cousin, he has lar contributed. Bozena's starting salary is $32,000, asked you to answer the following questions to so she could contribute up to $1,600 and DMS convince Bozena to participate in the 401(k) plan would contribute an additional 5800. If she did and to help her choose among the six alternative decide to contribute to the plan, she has the fol- funds. owing choices of funds, all managed by Superior investments. She may select any combination of the Standard unds and change the selection quarterly. Deviation Return of Return Beta U.S. Value Fund-a fund invested solely in a. USVF 13% stocks of U.S. firms that management believes b. RTF 12 to be undervalued GE 15 0.6 Research & Technology Fund -a fund sped GBF 7 0.3 cializing in stocks of companies or firms pri e HYD 10 03 marily emphasizing computer services and MF 4 0.0 0.0 programming 1. If Bozena participates and the 401(k) carns | Global Equities- fund invested solely in 10 percent annually, how much will she have stocks of firms with international operations, accumulated in 45 years (to age 67) even if her such as Sony salary does not change? Government Bond Fund-a fund devoted 2. If she does not participate and annually saves to debt issued or guaranteed by the federal $1,600 on her own, how much will she have government accumulated if she earns 10 percent (before High-Yield Debt-a fund devoted to bonds tax) and is in the 20 percent federal income with non-investment grade ratings tax bracket? Money Fund fund investing solely in short 3. If she retires at age 67, given the amounts in term money market instruments (1) and (2), how much can Bozena withdraw and spend each year for 20 years from each The historic returns of each fund, the standard alternative? Assume she continues to earn viation of the returns, the fund's beta (computed 10 percent (before tax) and remains in the ative to the S&P 500 stock index), and the R2 of 20 percent federal income tax bracket. ta are provided in the table. Ken's employer offers a defined benefit pen. 4. If her salary grows, what impact will the in in plan in which his retirement income depends crease have on the 401(k) plan? To illustrate the effect on her accumulated funds, assume a $5,000 increment every five years so that she is earning $72,000 in years 41-45 (ages 63-67). 5. What are the risks and potential returns asso- ciated with each of the six alternative funds? 6. Who bears the risk associated with Bozena's retirement income? 7. Why does Ken not have to make these invest ment decisions? What are the risks associates with his retirement plan? 8. At this point in Bozena's life, which alter native(s) do you suggest she select