The Pitfalls of Investing in Your Employer | weareallmukmuks.com

Edited by CRISTINA LOUROSA-RICARDO

There are plenty of stupid investments you can make in this world. Stock in Pets.com and Washington Mutual didn?t work out so well. Nor did those Las Vegas condos. Some of the social media and Web 2.0 stocks flying high on Wall Street will probably follow suit.

But the most foolish investment of all may be right in front of you. And there?s a worrying chance you?re buying it.

The investment? Stock in your own employer.

According to data from the Employee Benefit Research Institute, only about 40% of employees participate in 401(k) plans that even offer the company?s stock as an option. Those employees are still investing from 16% to 19% of their plan portfolios, on average, in their employer?s stock. At the same time, they have been shrinking their overall equity exposure dramatically.

One dollar in your employer for every two dollars spread across all the other companies out there? It makes no sense.

First, you already have a big investment in your employer. You work there. If you are hoping to work there for some time, it may well be the biggest investment in your portfolio.

The value of an investment comes from its cash flow. Let?s say you?re hoping to earn a modest $45,000 a year for the next 10 years. An annuity producing that series of cash flows might cost you about $380,000. For 20 years: nearly $600,000.

No, a job and an annuity aren?t identical. But the analogy is useful. Your cash flow already gives you a huge stake in the company. Do you need to double down?

Legions of workers did just that and became two-time losers. Their employer collapsed. They lost their incomes and their savings at the same time. Think of Enron. Think of WorldCom. Think of all those who worked at banks that collapsed in 2008. Bank of America and Citigroup avoided bankruptcy, but their stocks fell to pennies on the dollar.

The second problem with investing in your own employer?s stock? It?s based on the theory that you?ll benefit from the company?s improved performance and that you?ll have incentive to contribute. You?ll be a stockholder as well as an employee, and you?ll think like one. Employees buying company stock think they will have some influence over how it does.

Good luck with that.

The theory is fine if you work for yourself, or in a small partnership. But in a company of 500 or 1,000? No matter how hard you work, you won?t have any material effect on the share price. The only people who can do that are the senior executives.

Speaking of whom: Many people who buy company stock think they?re following safely in the footsteps of top executives. But this, too, is an illusion. Even if the CEO holds $10 million in company stock, so what? His financial situation is totally different from yours. He may hold $50 million in other investments. If he gets canned, he may have a golden parachute and a network of golden handshakes to fall back on.

And are CEOs really investing in the company? Most just get free stock and options?which they then sell.

?Brett Arends, SmartMoney Magazine

Eye on Overdraft Fees

Bank overdraft fees are the latest target of the Consumer Financial Protection Bureau, which said last week that it would demand data from the biggest financial institutions and look at ways to make the fees on checking-account statements easier to understand.

This overdraft-fee campaign could eventually help consumers avoid unexpected charges.

The bureau said it will gather data ?from several of the largest banks in the country to evaluate how those institutions? overdraft policies affect consumers,? without specifying which banks were asked to supply data.

The American Bankers Association has said most bank customers don?t pay overdraft fees and that customers can avoid the charges by keeping extra money in their accounts or by linking checking accounts to savings accounts.

The bureau, however, said it?s concerned some banks may be charging and calculating the fees in a way that is misleading or confusing for consumers and that the banks aren?t consistently following previously outlined ?best practices.?

?Maya Jackson Randall, Dow Jones Newswires

Bypass the 10% Penalty

Thinking about raiding your retirement funds? There are ways to do so without triggering the dreaded 10% penalty on early withdrawals for people under the age of 59?.

If you leave a company in the year in which you turn 55 or older, you can take penalty-free withdrawals from a 401(k) plan. (The distribution would be taxable, of course, but the 10% penalty would not apply.)

There also are ways to avoid a 10% penalty with an IRA.

IRA owners can take so-called 72 (t) withdrawals. Under their rules, you can start taking these withdrawals at any age. But once you start, you must continue for either five years or until you reach age 59??whichever is longer. (You can do it with a 401(k) as well, but you must have left the company first.) Moreover, because the payments are calculated according to actuarial tables, you won?t be able to adjust the amounts.

IRA owners who are unemployed can take distributions from a SEP, Simple, Roth or traditional IRA to pay health-insurance premiums for themselves, a spouse and/or dependents. You have to have received unemployment compensation for at least 12 consecutive weeks among other qualifications, says Ed Slott, an IRA expert in Rockville Centre, N.Y.

?Anne Tergesen, Encore Blog, SmartMoney.com

Tooth Inflation

How sweet it isn?t.

The average gift from the Tooth Fairy dropped to $2.10 last year, down 42 cents from $2.52 in 2010, according to no less an authority than the Original Tooth Fairy Poll, which is sponsored by Delta Dental Plans Association.

?But the good news,? their PR folks hasten to add, ?is she?s still visiting nearly 90% of homes throughout the United States.?

Some other data points:

• The most common amount left under the pillow by the Tooth Fairy is $1.
• Most children find more money under the pillow for their first lost baby tooth.

?Total Return Blog, WSJ.com?The Aggregator, edited by Cristina Lourosa-Ricardo, features news and commentary from The Wall Street Journal and other Dow Jones publications. Email: cristina.lourosa@wsj.com

Corrections & Amplifications

About 40% of workers were members of plans that offered company stock as an option, according to data from the Employee Benefit Research Institute. An earlier version misstated that about 40% of 401(k) plans offered company stock as an investment option.

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