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“The mystery of the 801(k)rock !!!” by Katherine Sanders

LEAVENWORTH, Kan – The basic teaser is that these “801k” plans will make 401(k) plans obsolete, because they can generate dramatically higher returns. The 801(k) just comes from doubling the 401(k), though I suppose if they really wanted to do that we’d be talking about an 802(w) plan. Not as sexy, eh? DRIP stands for Dividend ReInvestment Plan, DSPP for a Direct Stock Purchase Plan, and the terms are often used interchangeably. In this context, they are direct accounts offered by many individual companies that allow you to buy stock directly from the company on a set schedule (i.e., $25 or $100 a month, for example), and to reinvest your dividends automatically.

DRIP/DSPP plans certainly exist and work, and you can open them with many of the best companies in the country. But on the whole, they do not offer anything dramatically different than you would get by buying the same company stock from a discount broker — many people do still recommend them, and they can be a valuable part of some investing strategies, but similar performance is certainly available by using low cost or free brokerage accounts.

And even though the term 801(k) is clearly designed to make you believe that there is some magic tax connection here, these plans have nothing to do with taxes — they are all taxable, to my knowledge, though I’m not a tax advisor, and they have nothing to do with the company match you might get in a 401(k) plan, or with the pre-tax contributions many people can make to a 401(k) or a traditional IRA. As I’m sure is obvious to many of you, there is no section 801(k) in the tax code.

DRIP plans from individual companies essentially offer a slight discount (sometimes — on the other hand, they sometimes also charge fees), dollar cost averaging, investing discipline, and automatic reinvestment of dividends. This last bit, in particular, was revolutionary in the 1960s when brokerage accounts were uncommon and commissions high. Today, in my opinion, you can easily do much the same thing through most discount brokers with easier bookkeeping and management, though of course it all depends on your specific circumstances, preferences, account size, and goals. Essentially, this is how the process works for both a DRIP plan and a standard brokerage-managed dividend reinvestment plan:

For the DRIP/801(k) strategy:

1. Buy one share of a company’s stock, you might have to get the actual certificate and make sure the share is listed in your name (not in “street name”, as it might be at most brokers). Some companies make this easier than others and will let you do it through their transfer agent, others make you buy the shares before you contact them.

2. Set up a DRIP/DSPP account with that company. For McDonald’s, for example, you would go to this page for the info, prospectus, and enrollment form. Nearly all companies that offer these plans provide information on their website, though some hide it better than others.

3. Set up your ongoing purchases — decide whether you want to put in $50 a month, or $100 a quarter, or whatever you want (within the individual company’s guidelines — they’re all different).

4. Start over with the next company you want to set up a DRIP with, and set up your files to enable you to track the individual accounts that you have with each of these companies.

5. Repeat until you’ve got your full portfolio set up of 2, 3, 5, 10, or 12 companies — as many as you feel like managing.

6. Watch your investment slowly grow as you dollar-cost-average in with more purchases on a regular basis, and allow all of the dividends to be reinvested in more shares.

This entry was posted on Sunday, February 1st, 2009 at 3:32 pm and is filed under Dollars & Cents. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.