Too Much Company Stock Can Be Hazardous to a 401(k) Account

Workforce has an excellent article on the risks of too much company stock in 401(k) plans.

In the last decade we have seen great old (and some new) companies cost their shareholders and employees billions of dollars.  This is especially tragic in retirement plans because for many people those plans may make the difference between a comfortable retirement and living on social security.

Morgan Stanley employees must love company stock in their 401(k) plan, because they don’t get out of it entirely when share values tank.

The New York investment bank uses its shares to match participant contributions. The 42,000 employees in the plan get $1 in stock for every dollar they contribute up to 4 percent of pay or a maximum of $10,000. Employees can transfer the shares into any of the 34 investment options in the plan.

The plan had about 16 percent of net assets in company stock in 2011, a company representative says. That is down from its 2010 federal filing showing 24 percent in company shares. Since August 2009, Morgan Stanley shares have dropped about 65 percent, to $14, from about $40.

Putting retirement assets in company shares shows workers have a lot of faith in their companies, but it also means workers may not understand the risk associated with investing in one stock, says Dan Weeks, founder and chief operating officer at BrightScope.

“Companies that look great today may not look great tomorrow,” Weeks says. “It is better for participants not to be overexposed in their retirement plans to company stock.”

The 2001 Enron collapse showed how retirement assets can disappear virtually overnight. The energy giant matched employee contributions in stock and barred employees from divesting until turning 50. When the Houston company’s unethical accounting practices were revealed, Enron shareholders—many of whom were workers with retirement accounts—lost billions of dollars.

Enron is not the only company that has seen its share price collapse.  Eastman Kodak, one of America’s oldest companies filed for bankruptcy recently;  in 1996 it was $80/share.  General Electric went from a peak of $50 to $6 at its bottom.  Corning Glass from over $100 to under $2.

“You should never have undiversified risk in your portfolio. Holding any single security is way too risky,” says Robyn Credico, defined contribution practice leader at Towers Watson & Co. in Arlington, Virginia. “And in putting a cap [on company shares] doesn’t get rid of the risk, it only limits the extent of the liability.”

That’s good advice and something that we practice every day.

 

 

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One thought on “Too Much Company Stock Can Be Hazardous to a 401(k) Account

  1. […] as we have previously discussed, the use of company stock in a 401(k) should be avoided or strictly limited. Share […]

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