You are viewing an archive of a previous version of etfguide.com. Click here to browse current articles or return to the main site.

Is Risking Your Retirement Future on Company Stock Smart?

Is Risking Your Retirement Future on Company Stock Smart?
Ron DeLegge, Editor
July 12, 2010


SAN DIEGO (ETFguide.com) – Do you own company stock within your 401(k) plan? If you do then there’s a good chance you’re taking more financial risk than you know.

 

Even though your company’s stock may have done well historically, what happens if the company begins to falter?


Who’s to blame for too much company stock stuffed inside 401(k) plans? Is it employers? Is it  employees? Or is it the 401(k) provider?


Let’s analyze these questions along with actionable strategies that can help you to reduce the risk of company stock within your 401(k) plan.


First Line of Defense: You
The traditional view of company stock is that it motivates employees to perform. And if they do, the corporation’s sales and earnings increase resulting in a higher stock price. It’s a win-win situation for everyone.


But what happens when the company’s stock implodes because of a scandal (see Goldman Sachs), a catastrophe (see BP), maybe fraud (see MCI Worldcom), too much competition (see Circuit City) or another unexpected adverse event?  Employees suffer. And if they’ve unwisely overdosed on the company’s stock it could wipe out their retirement savings.


Therefore, the first line of defense (and responsibility) in reducing the risk of owning too much company stock inside a 401(k) plan starts with employees. Don’t do it! However, if you’ve already convinced yourself that your company is well-managed and could never go belly up, congratulations! You’ve just joined a long and storied tradition of bankrupt retirees that thought the same thing.


For the rest of us, here’s a suggestion: If company stock represents more than 50% of the total value of your 401(k) plan, you’re probably taking too much risk. And by diversifying into other investments within your 401(k) plan, like mutual funds that hold a portfolio of stocks and bonds, you can immediately cut risk. Make the adjustments as soon as possible.


Second Line of Defense: Your Employer
Employers don’t always lookout for the best interests of their employees even though they should. This is especially true with stock ownership inside 401(k) plans, where the perception is that employers are helping their employees by giving them more and more equity in the company.

Stock ownership, depending on the company, can be both a blessing and a curse. The tiny percentage of employees that made their millions by investing in company stock are easily outnumbered by the thousands (maybe millions) that have lost.


In this regard, companies should be protecting both themselves and their employees. How? By imposing limits or restrictions on employee stock ownership within 401(k) plans. And if stubborn employees want to violate those guidelines, they can, but they first need to sign a waiver releasing their employer and 401(k) provider from any legal liability tied to losses should the company's stock price fall in value.


These powerful preventative steps can reduce the corporation’s legal liabilities by keeping parasite attorneys who file class-action lawsuits on behalf of “cheated” employees far away. It will also help employees to understand they alone are responsible for their own financial outcomes, both good and bad.


Third Line of Defense: Government Regulators
The Department of Labor (D.O.L.) and Securities and Exchange Commission (S.E.C.) have a dual responsibility to protect 401(k) participants. As such, these government agencies should immediately act in unison to minimize the problems of too much company stock within 401(k) plans.


I believe the D.O.L. and S.E.C. should place immediate restrictions on stock ownership within 401(k) plans. And if mulish employees want to violate those guidelines, they can, but they first need to sign a waiver releasing their employer and 401(k) provider from any legal liability tied to losses should the company's stock price fall in value. 


All of this would minimize frivolous class-action lawsuits against employers who choose to offer company stock as an investment option within their 401(k) plan.


Likewise, it would also eliminate the possibility of 401(k) providers being dragged into unnecessary litigation. By having a signed document from employees acknowledging they themselves agreed to exceed pre-determined stock ownership guidelines, they (employees and their dumb lawyers) have no one to blame but themselves. I think it's the perfect solution to a complex problem.


In summary, risking your retirement future on company stock isn’t safe, smart or prudent.  

CommentsAdd Comment

Mark said on July 16, 2010
  For those who think, oh if my stock started falling, I would get out before it dropped too far. The 401(k) participants at Enron probably thought similarly, but when their company started appearing in the news daily and their stock was plummeting, their 401(k) plan just so happened to be in the midst of a Blackout period during which time no changes could be made to their allocations.
 
 
Comment:
Your Name:
Your Email: (Email will not be displayed anywhere)
Verification Code: