Keep Your Beneficiary Designations Updated
The Supreme Court of the United States recently declared that a divorce decree does not override beneficiary designations. In Kennedy v. Plan Administrator for DuPoint Savings and Investment Plan, the plan participant married in 1971, and completed a beneficiary designation in 1974. No contingent benefiary was named.
The two divorced in 1994. Under the divorce decree, the ex-wife waived any rights she had in the plan. However, the beneficiary designation form was never updated. Kennedy wanted the assets under the plan, $402,000 to go to his daughter, but never updated the form (he did update the forms for a different plan). The daughter, also executor of the estate, wanted the Plan administrator to distribute the assets to her, but they would not because the beneficiary designation form still listed the ex-wife.
The court noted that a qualified domestic relations order (QDRO) can override a beneficiary designation, but that a signed divorce decree cannot. Whether this decision by the court extends to other agreements is unclear, but what is clear is that the designation form carries significant weight, and should be updated regularly.
A thorough financial plan should include periodic review of these and other forms, and you should review these (as well as all other estate plan documents) whenever a significant life event occurs.
Is Your Company’s Stock Too Concentrated In Your 401(k)?
I recently came across a Wall Street Journal Article discussing how employees were “guzzling” employer’s stock in their retirement plans. The article goes on to say that employees were pulling money out of the stock market, contributing less to conservative investments such as bonds, while increasing their stake in company stock. This is a recipe for disaster who may have forgotten the lessons learned from earlier corporate collapses this decade, including Enron, Global Crossing, WorldCom and more.
I understand why you might want to invest in your employer’s stock. You work there. There is an emotional attachment to the well-being of the company you work for. Of course you think the stock price will excel. There is a good chance that your employer’s stock price has been beaten down with the stock market being down over 50% from its peak in 2007. You know the share price should be higher, and you are sure it will rise again.
Company pride is an admirable thing and may be encouraged in other areas, but not when it comes to your retirement account. You’ve heard of the term diverisification. You can diversify your portfolio across stocks, strategies (value vs. growth), or across asset classes (stock, bonds, international). You can diversifty across sectors and even different money managers. In this case you want to diversify against your employer. Yes your employer.
While the major stock market indices are down around 50% or more, some individual stocks haven’t fared so well. Employees at Lehman Brothers saw their company stock lose almost all of its value in a matter of weeks, days almost. Some companies have had their shares battered down 80% – 90%. Auto and financials were especially hit hard.
So it is not advisable to have a concentrated position in any one company, and the danger is exacerbated when that company also provides your paycheck. If something catastrophic happens, such as a bankruptcy or total implosion, you could potentially lose your job and your retirement plan in one fell swoop. It could devastate your personal finances.
I recommend taking no more than what the normal allocation to individual stocks are in your portfolio. But at the absolute maximum no more than 10%; 1-5% is more desirable. If your company offers a match if you purchase company stock, that should also be taken into consideration. If you have a high concentration now, check to see if you cannot diversify out of those shares without surrendering any matches that may not have vested yet.
