Money Management Q&As

February 18, 2005

Spin-offs; 401(k) boost; broker dispute

Could your portfolio benefit from spin?Q. A large company in my stock portfolio has offered me shares in a subsidiary it plans to "spin off." Is that apt to be a good investment?

A. According to Morningstar, the Chicago-based investment advisory firm, some recent studies show that spin-offs tend to do better than average, although at the outset the shares may be undervalued due to lack of publicity or for other reasons. As examples of spin-offs that produced worthwhile gains, Morningstar cites Moody's, a former subsidiary of Dun & Brad-street, and Zimmer Holdings, a spin-off from Bristol-Myers Squibb. In 2004, they climbed 44 percent and 14 percent, respectively.

Are you protected if a tour operator fails?Q. An ad for a European tour states that I'd automatically be covered by USTOA cancellation insurance if I sign up. How would that protect me?

Boosting participation in a 401(k) planQ. Our group practice's 401(k) plan matches contributions made by current employees after they complete a year of service. If we automatically enroll new employees in the plan, can we apply the same matching rule to them?

A. Yes, but you must allow new hires to choose not to defer any of their salary or to alter the amount at a later date, and nonplan employee benefits can't be contingent on participation in the 401(k). You should give new employees a written notice explaining the plan details and how to exercise their rights as to whether and when they'll participate. You must also give them annual reminders.

Saving for college with tax-exempt bondsQ. I plan to save for my children's future college expenses by investing regularly in tax-exempt bonds. I may buy zero coupon issues, to avoid receiving periodic bond interest that I'd have to reinvest elsewhere. If I sell some of these bonds before maturity to pay college bills as they come up, will I owe any tax?

A. You might. For example, suppose you pay $3,000 for a newly issued zero coupon municipal bond that will accrue $200 in interest a year and will have a $5,000 value when it matures 10 years from now. You sell it after seven years, when it has accrued $1,400 interest. But say market interest rates then are lower than they are today, and the bond's value on the market doesn't rise much; you get only $4,600 for it, a gain of $1,600 over your $3,000 original purchase price. Subtracting the $1,400 of accrued tax-exempt interest leaves a taxable capital gain of $200.

Settling a dispute with a stockbrokerQ. I took a sizable loss on a stock trade that I think my broker mishandled, but he denies that he did. He suggests we take the case to mediation or arbitration. What's the difference between them?

A. Mediation is informal and nonbinding. The mediator doesn't decide who's right. Instead he helps the parties try to negotiate a resolution that will be enforceable only if both sides agree to it. In arbitration, an impartial person or panel hears all sides of the issues as presented by the parties, studies the evidence, and then decides how the matter should be resolved. Arbitration is final and binding, subject only to very limited review by a court.