WHERE DO YOU WANT YOUR MONEY TO TAKE YOU TODAY?
income tax. There are three types of supplemental plans: profit-shar- ing, thrift and savings, and salary reduction plans.
PROFIT-SHARING PLANS. As the name implies, profit-sharing plans allow a company’s employees to share in the company’s earn- ings. Proponents of profit-sharing plans argue that these plans give an added incentive to employees to work harder. They reason that if the employees work harder, the firm will be more profitable, with the earnings flowing back into the employees’ pockets. Whether or not this actually happens is unknown. However, both employees and employers like the benefits of this type of plan. For one, a profit- sharing plan may be tax qualified, and enjoy the same favorable tax treatment that a qualified pension or IRA would. Second, there is no contribution requirement for the employer. The company will simply contribute a percentage of its profits. Therefore, when there is a good year, the contribution may be larger than that of a poor-earnings year. A company will set certain minimum and maximum contribution percentages, so that the employees have a general idea of how big (or small) a given contribution will be.
Many times, a firm will contribute its own company’s stock to an employee’s profit-sharing plan. This doesn’t mean, though, that an employee’s contributions must be invested in that company’s stock. Generally, there is a number of investment options, such as stock and bond funds.
When investing in your employer’s company stock, there are some things to consider. First, if the company has a good year and is very profitable, you will benefit in two ways: Your employer’s con- tribution may be greater, and the value of that stock may increase. However, heavily investing in your employer’s company stock is gen- erally frowned upon. While you may feel that your company is very strong, that doesn’t mean that it will always remain that way. Should the company have a poor year, you may face a declining value in your profit-sharing plan, as well as uncertainty at work. If you can diver- sify your profit-sharing account’s portfolio, you’ll be better off in case something does happen.
Consider the predicament of the many employees of Enron Cor- poration. For the past few years, Enron’s stock has been going strong. It’s been trading in the $70–$80 range, hitting $89.625 on September