Allow me to introduce the Lottery Effect, the greatest mixed blessing in 401(k) plans. As a blessing, it can make your retirement incredible. As a flaw, it can keep you working until you’re 99. My first personal encounter with the Lottery Effect was last fall, after making a speech to a large group of retired Texas Instruments employees. Following the speech, I listened as a retiree asked a TI executive what she should do with her 30,000 shares of Texas Instruments. We are not talking about an executive here. We are talking about a working stiff. None of her shares had come from employee stock options. She had simply accumulated her shares by working many years and by participating in company savings plans. Her share holdings increased each time the stock split, which it has done four times since 1995. She had the good fortune and smarts to join one of the oldest high-tech companies in America, a primo bastion of intellectual capital. More important, she had stayed with it through thick and thin: through embarrassments the company suffered in consumer markets, through the sale of the defense businesses the company had acquired and through the endless cycles of the semiconductor industry. That night, TXN closed at $60. Her shares were worth $1,800,000. She was worried, she said, because the stock had been as high as $100 a share in the spring and it had been falling ever since. At $100, her shares had been worth $3 million. As the year closed, TXN was trading at $47 3/8. So it could be said that she had lost nearly half a million dollars between Labor Day and Christmas. In fact, I doubt that it bothers her or TXN retirees in similar positions very much. Whether she has $3 million or a mere $1,350,000, she still has more money than she ever expected to have. Unfortunately, the Lottery Effect has also had a dark side. Some stocks go down. Some disappear altogether. Many companies contribute shares of their own stock as employer-matching contributions to 401(k) plans. J.C. Penney shares, for instance, have plunged from a high of $77 & #733; on April 1, 1998 to a year-end close of 10 7/8. That’s a loss of 86 percent. It also means that every share of JCP held in the company’s 401(k) plan is now worth pennies on the dollar. Rank-and-file employees, who number some 291,000, have lost millions. Worse, some are facing forced retirements as the retailer grapples with its problems. Ironically, this is the same company whose board of directors rewarded the outgoing top management team with multimillion-dollar going-away contracts, an act that is the equivalent of giving million-dollar cashier’s checks to the captain and officers of the Exxon Valdez as compensation for running the ship aground. The problem here the one likely to get government attention is that J.C. Penney isn’t alone. A recent blurb in Forbes magazine on the subject of big but sinking 401(k) plans also mentioned Verizon, Sprint, Textron, Caterpillar and PPG Industries. In fact, the number of companies with “distressed” shares in their 401(k) plans is probably in the hundreds. Nor does a company’s share price have to collapse to be a long-term threat to employee retirement security. All it has to do is underperform the market for a long time. Over the last five years the S & P; 500 index has provided an annual return of 18.66 percent, while the average of 6,589 domestic companies in the Morningstar stocks database has provided a return of 2.43 percent. Over the last 10 years, 740 of the 2,285 domestic companies with 10-year records have provided annualized returns of 6 percent or less. This means millions of workers have essentially missed the greatest bull market in history, simply because their employers contributed company stock instead of cash that could be more broadly invested. Is there a way to avoid the Lottery Effect? Not while many companies meet their matching requirements with shares of company stock. Is this a serious issue? Absolutely. Years ago, traditional defined-benefit pension plans the kind that take responsibility for investing and deliver retired employees a monthly check for life came under fire because only some employees got pensions. Others were closed out altogether or received reduced pensions because they had changed jobs. Congress held hearings. Laws were changed. Plans were reformed and regulated. Indeed, pensions were so well-regulated that the traditional DB pension is now the dodo bird of employee benefits. Their population declines year after year. The Lottery Effect introduces the same kind of uncertainty to the rising world of defined-contribution 401(k) plans. Sometimes it’s feelings, not numbers Question: I am retiring. My problem is whether to take a lump sum or a monthly annuity. I have talked to several money managers and they all say the same thing: They all want to manage the lump sum for me. My package is around $400,000 if I elect the lump sum, or it will be about $3,300 a month for the rest of my life. I am 65 and in excellent health. My wife and I have around $600,000 in the stock market, mostly growth funds. I have about $150,000 in an IRA, and my Social Security will be about $1,400 a month. We also own three rental houses that are paid for plus our own home, mortgage-free. I am inclined to take the monthly payment. We would not have to make a significant change in our lifestyle on $4,700 a month. My wife isn’t sure. She is eight years younger than I am and worries about what she would live on when I die. What do you say? T.S., by e-mail Answer: Talk with the benefits manager where you work. While most defined-benefit pensions are offered in the form of a “life only” option a monthly income that ends when you do you can’t take that option without a specific sign-off from your spouse stating that she understands the consequences of the life-only decision. Most retirees choose the “joint and survivor” option. This pays a monthly benefit for the worker’s life, followed by a reduced benefit for the surviving spouse. Typically, the survivor benefit is 50 percent to 75 percent of the joint benefit. . While I agree with your feeling that there are sufficient assets to take care of your wife after your death, you need to address her feelings with some more specific plans about how her income will continue in the event of your death. Then you can both relax. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax: (214) 977-8776; or by e-mail: scott(at)scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.