"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Yes, this is my point.

As an example that might make things more clear, 401(k)s certainly often
offer bond funds. My experience with the various bond funds (investment
grade, junk, emerging market, and state municipal) I've owned over the years
is they pay a dividend (though technically it might be interest for tax
purposes) monthly.

As for stock funds, I see for one Fidelity's S&P 500 fund FSMKX has
regularly had June and December distributions. Vanguard's S&P 500 fund VFINX
has distributions each quarter. I haven't recently gone into the minutiae of
how much of such mid-year distributions are dividends and how much cap
gains.

To get back to the original poster: Barring more information, I still don't
think there's a black and white answer to the problem as you posed it. It's
a roll of the dice or an instance of "five will get you ten." On the other
hand, it seems to me some of the finer points of 401(k)'s that some
(Elizabeth for example) made certainly deserve further scrutiny. Or they
would if it were my 401(k).

Rich Carreiro wrote:
- quote -


I think Elle's point is that if you compare buying a fund in say Jan
2005 to Dec 2005 (whether before or after a Dec 05 distribution)...the
Jan 2005 buyer will earn more income from dividends/interest simply for
holding the fund the full year. The Dec 05 buyer ends up behind either
because he didn't receive income distributions during the year, or
because he's buying shares at a higher NAV (attributable to the
dividends/interest collected by the fund during 2005, but not yet
distributed to shareholders).

And of course one week's fluctuation in the stock market can completely
swamp this. The studies on this topic seem to illustrate the mundane
point that in a stock market that, on average, rises over time, it's
better, on average, to get your money invested earlier. With many
exceptions that make periodic investing much better on the stomach, if
not necessarily the wallet!

-Tad

"Elle" <elle_navorski[at]earthlink.net> writes:

- quote -

No, it doesn't matter. Your second sentence, while true, is
irrelevant. Why do you think there's anything special about
buying distributions?

First, capital gain distributions are completely and totally
meaningless -- they are an economic nonevent (the only effect they
have is a tax effect, which doesn't exist in a 401(k)). So the only
distribution that could potentially matter are dividend distributions.

Second, as for dividend distributions, they don't matter in the very
short term. If you buy $1000 of a mutual fund the day before a
dividend distribution your fund holding will be worth exactly what it
would be if you bought $1000 of a fund the day after a dividend
distribution.

Third, if you know up-front (like from a Morningstar report) that a
fund had a given total return in the past, or if you are assuming a
fund will achieve a given total return, distributions are irrelevant.
If you want to get a given total return at a given risk level, in
a tax-deferred account you don't (or shouldn't) care what portion
of total return comes from appreciation and what portion comes from
dividends.

Finally, "front-loading" doesn't beat "ongoing" because of distributions,
"front-loading" beats "ongoing" because in any investment that has a positive
total return, you do better the longer your money is working, and
"front-loading" (very slightly) increases the amount of time your money is
working. Front-loading will win in a zero-distribution environment and
it'll win in a zero-appreciation environment, as long as total return
is positive.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"Elle" <elle_navorski[at]earthlink.net> wrote in message
news:t1yhf.5260$wf.4423[at]newsread3.news.atl.earthlink.net...
- quote -

But you make the obverse assumption - that all 401(k)s have distributions
throughout the year - since you write that front loading WILL result in more
distributions. That's the point you missed, below.
- quote -

Total return of an investment is independent of whether that investment
makes a distribution*. If an investment has distributions, then you wind up
with more shares, but they are each worth less. No difference.

Focusing on distributions instead of total returns is the error. Investing
earlier WILL result in greater returns (on average). Whether it results in
greater distributions or not is uncertain, and doesn't affect the returns in
any case.
- quote -

The first part, at least, for sure.

* There is some debate about whether dividend-paying stocks do or should
perform better (greater total return) - the theory being that distributing
earned income to shareholders lets "the market" decide the best place to put
that money to work, as opposed to the company retaining the earnings and
automatically reinvesting it in its own business. This was posited when the
qualified dividend tax category was promulgated. For a counterexample, see
Microsoft. (One exception does not disprove an economic theory, especially
when there can be other factors at play.)

--
Mark Freeland
nNeEwTs[at]sonic.net

"Mark Freeland" <nNeEwTs[at]sonic.net> wrote
- quote -

I chose not to make an assumption that I don't think can be backed up
easily.

- quote -

Yes, it does matter. The more money in the account at the time of the
distribution, the greater the distribution.

- quote -

We're having a miscommunication. I think people know what I meant.

"Gene E. Utterback, EA" <Gene[at]AllianceTax.Com> wrote in message
news:dlt3jh$u72$1[at]domitilla.aioe.org...
- quote -

That's an excellent point, and one that I'd forgotten (it's been a decade
since I was in a plan like that). So let me modify my suggestion favoring
front-loading to one that says:

Figure out the least you need to contribute to get the maximum match -
e.g. if the company matches the first 6% you contribute (each time you
contribute), then take 6% of your annual wages.

Subtract this amount from the max contribution the government lets you
make annually.

This excess amount is what you should front load.

Using the same example figures that Gene used:
$168K annual salary * 6% = $10,080.
Fed limit: $14,000.
Front loading amount (diff): $ 3,920.

With a 25% max contribution rate allowed, you can contribute 6% (matched)
plus 19% ("excess", unmatched).

In January, you contribute 25% of $14,000 ($3,500).
6% ($840) was matched, 19%, or $2,660 was "excess",
leaving you $3920 - $2660 = $1260 excess to continue front loading.

So in February, you contribute your 6% ($840) for matching, and $1260 in
excess contributions. Total contribution for February: $2100.

For the remaining 10 months, you drop your contribution to 6% (for
matching). That means you contribute 10 * $840, or $8,400 for the last 10
months.

Total contributions: $3500 + $2100 + $8400 = $14,000.

This way, you front load as much as possible without losing the benefits of
the match. It does require a little arithmetic, and the ability to change
the amount of contribution on a per-payroll basis.
--
Mark Freeland
nNeEwTs[at]sonic.net

"IndyPeter" <IndyPeter.1yrh6p[at]news.investmentbanter.com> wrote in message
news:IndyPeter.1yrh6p[at]news.investmentbanter.com...
- quote -

You've gotten some good responses addressing your question, so I won't add
to that. What I'd like to do is to provide you with information you didn't
ask for.

Many 401(k) plans only make matching contributions when you make a
contribution. The wording in some of the plans I've seen is so specific
that if you stop making contributions because you have reached the limit,
then the company no longer matches either. For example, let's assume that
your limit is $14,000, you make $14,000 per month ($168,000 per year) and
the company matches one half of the first 6% of your contributions, but
allows you to defer 25% of your income up to the limit.

You choose to max out the contribution and defer 25% - $3,500 - each month.
Your employer puts in 3% - $420 - as a match.

At the end of April you will have deferred $3,500 four times or $14,000 and
your employer will have put in $420 four time or $1,680. The grand total is
$15,680.

In May, you don't get to make a deferral because you have maxed out. Guess
What! Most plans also don't have to make a matching contribution because
you aren't. It sucks, but many plans are written that way.

Now lets assume that you take a different approach. Instead of maxing out
up front, you squeeze the employer. You defer $1,166.66 each month. This
is the annual max of $14K divided by 12. Your employer now matches the same
$420 a month but does it for 12 months.

Now at the end of December you will have deferred $1,166.66 twelve times or
$14,000. Your employer now puts in $420 twelve times or $5,040. Now the
grand total is $19,040 - $3,360 more than if you front load the plan. And
the quicker you can front load the plan, the more you miss out on employer
money.

Good luck,
Gene E. Utterback, EA, RFC

You're basically asking for the performance of lump sum investing vs
dollar cost averaging. If you search for "dollar cost averaging",
you'll find many sources on it. There are fierce disagreements over
this. Most of the source of the disagreement is in the interpretation
of the question. Let me introduce another case C, which is back loading
the contribution at the end of the year. During DCA debates, some
people are assuming case A vs case B. Other people are assuming case C
vs case B. So they're arguing two different things.

- quote -

Sure, theoretical is not too hard. Set your assumptions. For example,
S&P500 total return = 10%. Money market return = 3%. Annual
contribution = $14,000. Case A is trivial. For Case B, you'll probably
want to make the assumption that you invest the non-contribution amount
in a money market. So make two columns to track contributed

But let me ask you if Case A is realistic. You don't have $14,000 at
the beginning of the year to contribute. Contributions are deducted
from each paycheck. More realistic is Case C, where you save up during
the year and then invest in one lump sum.

Theoretically speaking, Case A > Case B > Case C. Theoretically, you
should invest any contributions as soon as you have it to maximize
return.

- quote -

Actual data is pretty tough to calculate because you'll need biweekly
S&P500 total return data. Your best bet is probably to search for
dollar cost averaging articles that have already done the calculations.

Elle wrote:
- quote -

Since most 401(k) investments are in mutual funds that often have a
single distribution in December, the "best" one can say is that front
loading MAY result in greater distributions. Regardless, it doesn't
matter - any distributions simply get reinvested (unless you are going
to take a loan against your retirement plan, or otherwise drain your
plan).

- quote -

401(k) contributions can only be made by your employer (in conjunction
with reducing your salary to pay for those contributions); you can't
literally "draw down" external moneys. Though, since you may be left
with less take-home pay than you spend, it could be said that you draw
down external moneys - but this draw down is not to make later
contributions, but to fund the current ones (that are leaving you with
too little pay). That could happen with Strategy A, but shouldn't
ordinarily with Strategy B.

If you can afford to front load, by all means do so. You can always
find a third way. If you don't want to dump everything into the market
at once (which, as Rich smartly illustrated, will tend to do better),
you can average in to the market (as if you were following Stragegy B).
Whatever excess you contribute in January can be put into a cash
equivalent account within the 401(k). You get the stability of Strategy
B, but the added benefit of sheltering more of your money, earlier.

There's another benefit to front loading. If something happens with
your job - you take a few months off, you switch jobs and your new
employer has a 1 year waiting period for participation, etc., then
you've still managed to max out. FWIW, I front load, and have allocated
as much as 50% for contributions.

--
Mark Freeland
nNeEwTs[at]sonic.net

Strategy A will result in greater dividend distributions
each year, simply because more (stock or whatever) shares
will be held in the account for the whole year than with
Strategy B.

OTOH, presumably you'd sock the money for Strategy B into at
least a money market account, and you would gradually draw
down on this account to make the 401(k) contributions. Money
market accounts are paying around 3.5% right now. (The S&P
500 dividend yield is only about 1.7% right now.) So with B,
you could enjoy a little income on the side from the
specified $14k, but that is somewhat to the detriment of the
growth of the 401(k). Plus, you have less money tax
sheltered using Strategy B.

Otherwise, I wouldn't expect the differences to be
statistically meaningful. You're dollar cost averaging over
a long period, and the DCAing is what's important. The
roughly half-year's growth to which Rich alludes could
almost just as easily be a half-year's loss. (The markets
generally rise, over a long time period, so I won't say the
chances of it being a loss are the same.)

I'd do that which was appropriate for my situation. E.g. if
I were sure I wouldn't need the $14k for the whole year,
then I'd put the whole wad in on January 1st. If I thought I
might need it, then I'd put it in throughout the year.

I'd spend more time worrying about allocating the 401(k)
optimally than I would the timing differences you mention
below. I understand allocation is a better predicter of
return than almost anything else.

"IndyPeter" <IndyPeter.1yrh6p[at]news.investmentbanter.comwrote
- quote -

For example, lets say one
- quote -


Will your payroll department actually do this for you? Most plans have a
percent of earnings limitation and this limitation exists for each and every
pay period. Would your January income be sufficient to allow a $14,000
contribution? That would mean, if, for instance, the limitation were 25%,
that your January earnings would need to be $64,000. If your earnings aren't
that high, then you probably wouldn't be allowed to "front load".

Elizabeth Richardson

IndyPeter <IndyPeter.1yrh6p[at]news.investmentbanter.com> writes:

- quote -

Do some googling for stuff like compound growth with contributions.

- quote -

Consider the most extreme cases -- you make your contribution in
full on Jan 1 of each year vs. making your contribution in full
on Dec 31 of each year. It's pretty clear that the latter series
is simply the former series delayed by one year.

In other words, the difference between the two extreme approaches
will be one year's growth. And since your monthly contribution
is roughly a middle ground between the two extremes, the difference
between monthly contributions and "front-loading" will be approximately
one-half of a year's growth.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Does anyone know how to calculate a theoretical rate of return, say
based on the S&P500, of regular contributions to a 401(k) comparing
"front loading" the contribution at the beginning of each year vs
regular payments spread out over the year? For example, lets say one
contributes $14,000 per year to a 401(k). In case A one makes the
contribution each January in full. In case B one makes the
contribution in 26 installments of $538.46. What is the difference in
accrued amount over 20 years (using S&P500 data)? Is there a
significant difference in strategy A vs B?


--
IndyPeter