Company stock in your 401(k)? Proceed with caution

401(k) plans have made great strides in recent years–reducing costs, simplifying investment menus, and automating portfolio allocation. But a surprisingly large number of plans still include one feature that really should go: offering the plan sponsor’s own shares to workers.

Research consistently shows that owning your employer’s stock in a workplace retirement plan is risky. And although concentration of employer stock in workplace plans has been declining in recent years, stubbornly high pockets of concentration remain.

Vanguard, for example, says that 9% of defined-contribution plans that it administers offered company stock in 2014, down from 11% in 2005 (see orange line in the chart below). The percentage of plan participants who were offered or invested in company stock fell by larger amounts–and the percentage of participants with a concentrated position (over 20% of total account balance) dropped by about half. But among those participants who are offered company stock (dark blue line), over half still own it, although that number has also been declining.

company stock in DC plans

 

Aon Hewitt research similarly finds that, at companies where stock is available, more than half of workers own the shares–and that 23% of those workers had at least 20% of their portfolios in their employer’s stock. That’s a heavy concentration by any measure.

The continued use of company stock runs counter to best practices in retirement-portfolio construction. “People don’t understand how risky it is to own their own employer’s stock,” says David Blanchett, head of retirement research for Morningstar Investment Management. “If you went to the typical corporate plan sponsor and suggested that they add some other company’s stock as a plan option, they’d tell you it’s a crazy idea. But for some reason, it’s not crazy to offer their own stock. If companies are going to do it, it’s important to be very proactive about making sure people understand the risk and use this option responsibly.”

How are plan participants doing with their company stock? Vanguard’s research found the average five-year annualized return was 21%, but there was wide variation: The five-year annualized return was negative 0.04% at the fifth percentile and a positive 44% at the 95th percentile.

“If you happened to work for a company with returns in the top 5%, you earned a 44% return–that’s pretty sweet,” says Jean Young, senior research analyst in

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