Should you Invest your 401K in your Employers Stock?

Owning your employer’s stock may allow employees to share in the success of a company.  Conversely, the employee bears the risk that a company’s financial problems will also become the employee’s.  Your retirement is at risk, not your employer’s, if your 401(k) plan contains too much company stock.  This risk has actually been the cause of many mediators needing to settle disputes. Here are some rules about recognizing if you have “too much” invested in the company:

Diversity

Retirement portfolios should have diversity, in order to protect yourself from a downturn in a particular stock or sector of the market.  That was the purpose of creating IRAs and liberalizing 401(k) rules.  Most investors would not think of investing a majority of their retirement in gold, or the stock of their favorite retailer.  Yet a recent study found that between 15 to 19 percent employees in their sixties have put a majority of their 401(k) savings in their company’s stock.  The Employee Retirement Income Security Act of 1974 (ERISA) restricts traditional pension plans (also known as defined benefit plans) to investing no than 10 percent of assets in company stock.

Objectivity

The dramatic fall and disgrace of Enron in 2001 drew a spotlight on the consequences of owning too much stock in one company.  More than 57 percent of the employees’ aggregated 401(k) assets were invested in Enron stock as they became practically worthless.  Part of the reason for this concentration was that the company encouraged it.  Not only was the employer match 100% in stock (and not cash), but the corporate environment encouraged employees to put their nest egg in Enron.  CEO Kenneth Lay infamously told employees the company’s stock was “an incredible bargain”, just weeks before its collapse.  The lesson here?  Get an unbiased opinion of your company’s market health.

Liquidity

Your company has an incentive for you to invest in its stock – and to keep that investment there.  Because of that your company may restrict on your ability to sell the stock, or transfer it to another type of investment within your 401(k).  This limits the control you have on your finances when you might need the cash, or seek a better investment opportunity.  Employer-matched stock often comes with restrictions.  Some employers require employees to hold the stock until they reach a certain age, or until a certain year.  Unlike other investors who are free to sell and limit their losses, you may be stuck and unable to respond to your poor financial position.

Final Thoughts

As the market remains volatile, it is important to shield your assets – and your retirement years – from unnecessary risks.  Neither the prospect of relying on modest Social Security benefits, or working another five years when you have already reached retirement age, is attractive to anyone.  If you invest in company stock, do it with your eyes wide open.

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