Company Stock in Your 401k (How Much You Should Invest)

A month or so ago I suggested that you limit the amount of company stock in your 401k. The post centered on a Money magazine article that gave thoughts on company stock in 401ks. The main point was:

Buying your employer's stock, after all, amounts to placing two big economic bets on one company. If your firm suffers an Enron-type collapse - or even a less dramatic downturn - you could lose your job and a big portion of your retirement savings.

As such, their recommendation was:

So holding anything more than, say, 10 percent of your 401(k) in company stock is a lose-lose proposition: You're taking on more risk for what will likely be a lower return.

So consider this post your monthly reminder on the topic of company stock in 401ks. ;-)

MSNBC talks about all the positive changes happening with company stock in 401ks because of the Enron nightmare. Here are some of the key (positive) trends they see in 401ks and company stock:

Fewer "forced stock" plans. Like many companies, Enron matched its workers' contributions with company stock. But the plan locked them in. Employees had to reach age 50 before they were allowed to sell, so they couldn't diversify even if they wanted to. In 2001 (the year Enron died), 19 percent of 401(k)s had similar plans; today, that's down to 8 percent, the consulting firm Hewitt reports.

Fewer temptations to load up on company stock. In the bubbly '90s, workers threw their own money into company stock, even when they were also getting it as a match. This kind of double-dipping was sanctioned by 46 percent of big-company plans in 2001. Now that's down to 34 percent. Some companies limit the amount of stock you can buy, with caps ranging from 10 percent of your account to 50 percent. Forget the high end. Five percent is plenty, planners say.

However, these changes aren't yet having a major impact:

Where company stock is offered, employees still keep about 20 to 30 percent of their money there—almost as much as they did before Enron collapsed. "It's not inertia," says Dallas Salisbury, head of the Employee Benefit Research Institute (EBRI). "They've done well with their company stock over the years and don't think the Enron fraud is relevant."

It might take some time -- as it often does in money matters -- before people get wise to the fact that 5-10% of their retirement in company stock is plenty.

But as for you, dear reader, you're "in the know" now. So you may want to re-evaluate how much company stock you put into your 401k as part of your overall asset allocation plan. Doing so will likely not only improve your investment performance, but also protect you from taking a major hit if something drastic (like what happened with Enron) happens to your company.

Comments

[The Happy Capitalist]

I've always advised my clients against holding too much of their employers' stock in 401(k)s, ESOPs, ESPPs, etc. The interesting thing is that so many of the people I have worked with who acheived great wealth did exactly that.

[Kira]

I don't get stock in my plan but I would be VERY fearful of having that much in ANY stock. I see people's net worth graphs go up and down because of minute fluctuations in their employer's stock.

I think that it is quite possible to get rich on employer stock, but so few people work for a company for long enough, and few companies are stable enough, that they can bank on the stock and feel secure. Also I bet a lot of those people started working there when the company was much smaller and the price was a lot lower.

[Shukuran]

this article http://www.research401k.com/401k-company-stock.html also talks about diversification and investing too much of your retirement assets in company stock

"In a survey of 458 firms conducted by Hewitt Associates, 83% of them said they did not place any restrictions on what percentage of their 401k retirement savings can employees invest in their company's stock. This therefore means the employees are taking on unlimited risk when investing in their company's stock."