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.