Last week on MomsMakingaMillion, one of the the hosts, Gina Robison-Billups grabbed hold of one of the tips about how your 401(k) plan is structured: don’t own too much of your company’s stock in your retirement plan. This is not a new problem for investors in these sorts of defined contribution plans. And even though it has been identified as problematic, little has been done to keep the employee from putting an out-sized portion of their retirement plan in their own company’s offering.
Why do we continue to do this? There are several reasons. First of which is how your company’s 401(k) plan in structured. When an employee becomes eligible to begin investing in the plan, they often find that the company match, the funds the company invests with you, up to a certain percentage, is often only offered in the company’s stock. And because we are always suggesting that the employee take the company match, at the very least, they take our advice and begin to load up their portfolio with shares of their employer.
Often, when this sort of offering is available, it is one of the few buy-and-hold restrictions in the plan. That means that if the fortunes of your company drop, for whatever reason – poor quarterly earnings, lackluster forecasts or simply a cyclical turn of events, the employee must ride out the downturn. This can be a big deal if the employee is long-term and because of that, has a huge chunk of their retirement tied up in that stock.
You might also say: “If the company does really well, I’ll be rich!” This sort of thinking is often offered by employees who believe they have an inside feel for the prosperity of the company. Unfortunately, this is not always the case. Once a downturn takes hold, and they always do to some degree, the employee becomes anxious about their good fortunes. But those stock restrictions (mostly on when you can sell, not on how much you can buy) cause the most anxiety.
What we don’t do is a very good job on evaluating the company itself, at least not the way we tend to scrutinize the rest of the available investments in the 401(k). Peer pressure (your co-worker does a sort of happy dance with each uptick of the stock, often monitored in real time on their computers) and greed often freeze us in our tracks.
This also puts the company in a precarious position. How do you tell your employees to divest when the plan might not allow it or when you know that there is something on the horizon that might have an effect on the stock price? Some of these employees may have been given compensation in the form of stock when the company was not yet offered to the public. Higher paid employees can often direct an additional 2% of their income, which often finds its way into more company stock.
There are some things that can be done by both the employee and the employer. The employee should recognize that your investment strategy is not that of your co-workers. Ignore the happy dance, ignore the bragging about how well they are doing and instead focus on the first rule of investment diversity: spread your risk. Chances are, you not only hold your own firm’s stock in your portfolio but in many of the mutual funds you invest in as well. Rather than sell those funds, use them to give you the company exposure (and exposure to other businesses as well, ones that the fund manager feels makes a good investment) you need to diversify.
The employer should recognize that these plans are not for their own promotion. There is a fiduciary responsibility to provide a diverse atmosphere in which to grow retirement investments and an educational obligation to help them do so. Offering a match with company stock does neither. This is a conflict of interest (the company vs. that of the employee investor) that unfortunately is very much still on the employee’s shoulders.
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