401(k) investments in employer stock take a surprising jump
Posted on 25 March 2009
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/401k-investments-in-employer-stock-take-a-surprising-jump
In the midst of economic calamity, retirement investors started 2009 by doing something surprising: they loaded up on their own employers’ stock. In January, more new 401(k) fund dollars went into the stock of investors’ employers than any other type of investment.
Hewitt Associates, the employee benefits consulting firm, reported that $65 million was invested in company stock in January. It was the first time in seven years that company stock topped other categories of investment, and it was a sharp departure from recent trends, which have seen employees diversifying their holdings away from their own employers’ stock.
Hewitt speculated that employees may be looking at their employers’ shares as a familiar, safe haven in the market storm. “Sometimes people look at the stock of their employer differently than they do the outside world,” says Pamela Hess, Hewitt’s director of retirement research. “It’s close to them and they have trouble looking at it in an unbiased way.” And in some cases where a particular company is doing well, company stock might look attractive compared with the market’s broader performance.
But investing in company stock is a form of doubling-down on risk, especially during a recession. If your employer performs poorly, you can lose your job and your retirement savings. The risks were demonstrated most dramatically by the fall of Enron in 2001. At one point, more than 60 percent of Enron employee retirement holdings were tied up in the company’s stock–fueled in part by a 401(k) match of Enron shares. Many Enron employees lost their savings when the stock collapsed when the company filed for bankruptcy.
The Pension Protection Act of 2006 (PPA) was passed–in part–in reaction to the Enron debacle (which, as a quick aside, looks trivial compared with what we’ve seen on Wall Street in recent months). The PPA law included provisions that ensure the right of employees to diversify out of employer stock.
If a company matches employee contributions to a 401(k) plan using company stock, PPA mandates that an employee with three or more years of service can transfer the value of the stock into mutual funds or other kinds of investments–and companies are required to provide notice to workers when they are entitled to divest the stock.
About two-thirds of publicly held U.S. companies offer their own stock to employees. Proponents see it as an effective way to align the interests of employees with management and other shareholders. But overall percentages of portfolios tied up in company stock have been declining–due to PPA and reforms in company plans.
“It’s been declining steadily, on average, for more than a decade,” says Hess. “There has been a push for employees to diversify ever since Enron.” Hewitt’s data shows that 14 percent of average retirement assets were in company stock at the end of 2008.
A report issued by Fidelity Investments earlier this year showed that company stock made up about 10 percent of Fidelity’s assets in workplace savings accounts at the end of 2008–down from over 20 percent in early 2000.
But the Center for Retirement Research (CRR) at Boston College argues that the percentages of employee stock ownership actually are somewhat higher than they look. That’s because employee stock is typically offered by larger companies; when CRR looked only at companies with more than 5,000 employees, it found company stock accounting for 26 percent of holdings at the end of 2007–compared with just 11 percent of all employee retirement assets.
Most experts advise investors to hold no more than 10 percent of company stock in their portfolios–and many advise keeping the figure at 5 percent or lower.
Some experts even argue that company stock has no place at all in employee savings plans. There’s even some discussion of legislation that would mandate an automatic diversification feature, similar to the way target mutual funds work.
In any case, here’s hoping the “no place like home” instinct is no more than a temporary blip on the retirement investing radar screen.
March 26th, 2009 at 1:31 pm
In 25 years of helping people invest retirement accounts, I’ve seen more bad than good from employer stock. It does SEEM safer because people are familiar with it, but many folks underestimate the impact of outside variables (or inside graft). The general financial planning rule of thumb is that no single stock should be more than 5% of a portfolio. Sadly, one place where people routinely exceed that benchmark is in retirement plans – likely their most important investment pool. When things go bad – often enough to warrant concern – they have no one to blame but themselves.