Chapter 10, Problem 1CC

Summary Introduction

Case summary:

The Company S hired Person X. Person X accepted the job because he felt that the company had a good potential growth. At the end of the first day, Person C met Person X and introduced him to the 401(k) plan. It is a retirement plan that the companies offer to their employees.

The employee has to contribute money from his pre-tax income to the 401(k) plan. The company would also contribute a maximum of 5 percent of the salary to the plan. The plan has the following options for investments:

1. 1. Investment in company stock
2. 2. Investment in A“S and P” 500 index fund
3. 3. Investment in A small-cap fund
4. 4. Investment in A large-company stocks fund
5. 5. Investment in A Bond fund
6. 6. Investment in A money market fund

Characters in the case:

• Company S: The recruiter.
• Person X: The new employee.
• Person C: The employee of Company S working in Finance section of the company.

To determine: The advantages and disadvantages of investing in mutual funds when compared with the company stock.

Introduction:

Mutual fund refers to the investment in a group or portfolio of assets.