The 411 on the 401k

Or, when stealing becomes charity

By Jerry Fraser

I first heard of 401k plans about a decade ago. “They’re a hell of a deal,” a co-worker at a Florida newspaper told me. “The company matches half of what you put in, up to six percent of your pay. It’s like giving yourself a three percent raise. ”

This colleague designed page one every night and was certainly paid more for that than I was for double-checking the hometowns of next of kin on the obituary page. (Did you know that it’s Silver Spring, Md., not Silver Springs?)

Adding to my friend’s good fortune was the fact that his wife was also gainfully employed. They had no children and wisely lived within their means. On slow newsdays he would check his mutual funds and share with us his plans for a solid financial future.

I on the other hand was trying to keep two homes going, a Florida rental and my house in Maine, and my wife and son were both in college. When the newsroom was quiet I rolled debt from credit card to credit card and studied the form for the local dog track. Unlike my friend, I kept my financial strategies to myself, other than borrowing the occasional $20 when a greyhound looked too good to pass up.

My take-home pay was about $1,600 a month. Of that, $1,100 went toward my house payment and rent and $239 toward my car payment. If you’re keeping score, that left $261 a month for groceries, utility bills, clothing, household expenses, spending money, and college tuition for two. So I didn’t have a 401k, because I couldn’t afford to give myself the 3 percent raise.

I stood this for a year and a half, until I was rescued by the Boston Globe. I jettisoned the Florida rental and returned to Maine and began to live the lifestyle I deserved. Before long, however, the agencies that had been deferring the assorted tuition loans for which I was on the hook ran out of patience, and soon we were once again living on $261 a month.

I had been at the Globe about a year when the subject of 401k plans came up anew. A fellow editor arranged a presentation on the merits of the 401k for several 40-and-under toilers on the night desk. This was a sober affair at which two mutual fund company representatives stressed the tax advantages of a 401k plan. With a reasonable rate of return — eight percent, they suggested, “although of course there are no guarantees, despite the historic appreciation of equities” — participants could if nothing else be certain they were laying the foundation for a solid financial future.

The truth, of course, is that eight percent is peanuts, and while tax deferments are nice, I hadn’t come this far to bleed my paycheck white. You know that, I know that, and the fund salespeople know that.

What they also know, however, is that you will examine their literature and be swept off your feet by the 15, 20, or even 30 percent appreciation of their hottest funds. They know that you will spin the little whiz wheel they give you until $100 a week contribution lands on the picture of a beach house on Grand Cayman Island and a half million in cash.

“Where do I sign?” I asked. I wanted to “max out” my plan, but settled for a contribution of $100 a week.

“A hundred dollars a week!” my wife said breathlessly when I called her. “What are we supposed to eat?”

“It’s important to lay a foundation for a solid financial future,” I told her. “We’ll just have to tighten our belts.”

“What belts?” she said.

I had zero investment experience, so I chickened out of the go-go funds that came with the Grand Cayman place and went for a boring mix of stocks and bonds. “What’s wrong with eight percent,” I thought; “no one ever went broke taking a profit.”

The market was retrenching and when the first quarter ended my 401k account had in it $94 less than the Globe and I had contributed. I told a friend, who upbraided me. “What are you doing with bonds?” he said. “They’re for your grandmother.” He told me that at age 40 I was getting a late start — just as he was. “We gotta play catch-up,” he said. “We gotta hang our ass out.”

So I dumped my dowdy portfolio and moved into a mix of high-tech and new-economy offerings. My safety-net included several companies creating life in test tubes.

I know what you’re thinking, but you’re wrong. There were five funds in all. Each earned double digits, and the net asset value of the high-tech fund doubled within a couple of years.

“This is like stealing,” I thought. So I transferred everything into the high-tech fund and watched the rocket climb. Within three years I was discreetly inquiring as to the tax penalties I’d incur if I took the money out of the 401k. Clearly the day was coming when it simply would not make sense for me to hold a job.

I left the Globe in 1997 and went to work in Portland, but I left my money where it was. “Compound interest is the eighth wonder of the world,” I told anyone who would listen. “Let me tell you about my 401k.”

The economy hiccuped in 1998; what me worry? In 1999 my nest egg grew by 49 percent.

I know what you’re thinking, and this time you’re right. My high-tech fund has gone south with the rest of the market. The good news is that in a couple years I’ll have the first of 16 college loans paid off and I’ll come ahead by $58 a month, which I plan to put into savings bonds. Meanwhile I clip coupons, shop at Marden’ s, and write free-lance columns and get paid by the word, and my editors really like my stuff.

Jerry Fraser can be reached at cfraser@maine.rr.com.