In early June, companies with December year-ends will release their 2009 11-K reports. You can be sure there will be a lot of smiling faces this time around with most 401(k) plans performing exceptionally well this past year. One plan and company I'm particularly impressed with is McDonald's (NYSE:MCD). McDonald's limits employee's purchase of company stock to 20% of their annual contribution. It's a sensible limitation that has reduced the plan's overall returns in the last five years due to McDonald's five-year streak of positive returns. That's okay. Someday this will work in its favor as the stock price cools. In the meantime, have a look inside its 11-K. There are a number of good investment ideas.
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Losses in The Rearview Mirror
GuidedChoice.com is the advisor responsible for the investment choices in McDonald's profit sharing and savings plan. GuidedChoice.com, it is worth mentioning, counts Dr. Harry Markowitz - the man behind modern portfolio theory - among the founders. They've done a heck of a job. In 2008, when the S&P 500 dropped 38.5% and U.S. pension funds lost 26.2%, its investments dropped just 13.2% thanks to a total return of 8.3% for its stock, which accounts for 55% of the plan's total investments. In fact, McDonald's stock is currently working on a sixth consecutive year of positive returns and has a 21.2% average annual return compared to just 1.1% for the index. Even though its stock was up just 3.7% in 2009, the remaining assets should have generated plenty of returns for the plan this past year. We'll know how much soon enough.
According to 401(k) ratings group BrightScope.com, McDonald's plan gets a 57 rating putting it right in the middle of its peer group. Interestingly, BrightScope believes the quality of the investment options is in the top 15% of all 401(k) plans. Further, it gives McDonald's management high marks for its generosity. Where it loses marks is in the participation rate of employees. While the average account size is high at $50,000, unfortunately only 51,000 employees are enrolled. A 13.2% participation rate given the performance of the plan as well as the extra funds made available for employees beyond what most companies provide is simply perplexing. If you're a McDonald's employee and are eligible to enroll in the plan and currently aren't, you owe it to yourself and your family to sign up immediately.
Five Largest Common Stock Holdings
|Company||Value||2009 Return||5-Year Average|
|Hewlett Packard (NYSE:HPQ)||$3.39M||42.8%||21.7%|
|Gilead Sciences (Nasdaq:GILD)||$3.26M||-15.4%||16.1%|
The Usual Suspects
Its common stock holdings are routine. The largest of them listed above have all done well in the past five years. At the end of the day, boring is good when you are talking about retirement funds. There is, however, a few interesting selections that you might consider should they still be among the holdings in the new report. For instance, the plan owned $361,000 in K-Swiss (Nasdaq:KSWS) at the end of 2008. The athletic footwear company saw its stock drop for four consecutive years until pulling out of its death spiral in 2010 and is up 40% year-to-date. Another interesting holding is Masco (NYSE:MAS), maker of consumer products for the home including KraftMaid cabinets which you can see on ABC's Extreme Makeover: Home Edition. It's had a tough go of it during the housing downturn but seems to be recovering slowly but surely. Year-to-date the stock is up 34%, much better than the -7.3% annual return in the previous four years. Lastly, I recently wrote about the gold star management at Heartland Express. They're the real deal. (Check out the article. Read Heartland's Gold Star Management.)
While I haven't uncovered anything earth shattering in this article, I do think it highlights the need for plan holders to investigate what's inside their company's 401(k). In the case of McDonald's, it's nothing but goodness. (Learn some sensible strategies for making your hard-earned savings last for as long as you need them. Refer to Managing Income During Retirement.)
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