Investing Through Your Company: The Good, the Bad, and the Ugly
By Paula Santonocito
Companies frequently offer employees investment opportunities. While programs and plans may seem attractive, it’s essential to consider what investing through your company—or even in it—might mean to your financial security.
P Is for Perks
First, it’s important to recognize that companies view investment vehicles as part of an employee benefits package. As such, companies market various programs to job seekers and workers. This isn’t necessarily bad; after all, you want to be apprised of available benefits.
Popular offerings include 401(k)s, profit sharing, and employee stock purchase plans.
Participating in a 401(k) plan allows you to take a percentage of pre-tax income and invest it for retirement. An employer will sometimes match a portion of your contribution. You then choose where the money gets invested, such as in mutual funds, bonds or money markets. You may also have the option of purchasing your company’s stock.
Profit sharing is just like it sounds. A company allows you to share in the profits. Distributions, made annually, are based on company earnings. Plans vary greatly, but you usually have the option of deferring all or a portion of your distribution and investing it. One of the investment choices, as with a 401(k), may be the ability to purchase stock in the company.
Employee stock purchase plans are often standalone as well. Although plans typically have a monthly cap, they allow employees to buy stock in the company, usually through a payroll deduction arrangement, with no brokerage fees.
Each of these investment plans offers an opportunity to slowly grow your savings. Over time, the amount you amass can be substantial.
Of course, depending on the investment vehicle, income taxes and/or penalties may apply if you want or need to access money. Therefore, it’s wise to view these investments as long-term. These aren’t bank accounts.
As a result, you should only sock away what you can afford to do without. When investing through your company or in it, your focus should be on the long-term.
Since your view is long-term, it’s critical that you not overreact to every market swing. Sometimes your investments will go up, and sometimes they’ll go down, as SMW Money Editor Martin Brown points out.
Nevertheless, it’s wise to periodically review your investments and make changes to fit your situation and goals. If you’re a 24-year-old employee, for example, you might be inclined to take more risks than if you’re 54 with an eye on retirement.
Assessing Your Risk
And oh yes, there is risk–regardless of your age.
Investing through your company, paycheck by paycheck, or from year to year through a profit sharing plan, can be a highly effective way to build a nest egg. Many people have retired comfortably after years of participating in company-sponsored programs.
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