Your friend Bernadette just received her Masters in Pharmaceutical Engineering, is 25 years old and is starting a new job. She wants to save for retirement. Shell make $75,000 a year. She asks you for advice because she knows that you understand this business stuff. Her employer will allow her to contribute a maximum of 15% of her pay to her 401K. They will match contributions up to 6% of her pay at 75 cents for each dollar that your friend contributes. (The remaining 9% of the allowable contribution is not matched.) The company 401K plan has the following options for investment: (Assume these choices are typical for their type.)

An actively-managed equity fund

An equity index fund

A long-term bond fund

A bond index fund

A selection of target date retirement funds, 2020, 2025, 2030, 2035.and so on.

A money market fund

Note: The questions below link together. I think the easiest way is to read them all, and answer them all together, so basically write one paragraph (or two) which addresses all of them. You can answer however you like but separating each answer will likely lead to repeating yourself and taking longer.

a. What investment choice(s) would you recommend for your friend and why?

b. Lets say that your friend does not like your initial investment choice(s). What alternative could you suggest and why? (In other words, if the answer for part a is your best answer, what is your second best alternative?)

c. Why are your suggestions in parts a and b better than other choices? In other words, what logic did you use to come to your recommendations?

d. Assuming that she also wants to save up for a downpayment on a condominium, how much would you suggest (as a percentage of her salary) your friend contribute to her 401K and why?

e. What information about the above investment options would allow you to improve your advice to your friend?

What effective annual rate of interest is Stewart paying for this service?