Company Stock Ownership
Questions about company stock are some of the most frequently asked by our clients, and in light of the recent events involving Bear Stearns (NYSE: BSC) and JP Morgan (NYSE: JPM) we thought we would remind you about the importance of diversification and the risk of holding a large percentage of your retirement assets in your employer’s stock. I, like many of you, have been reading about the troubles at Bear Stearns and its recent acquisition by JP Morgan. What caught my eye was that almost one-third of the company’s stock was held by employees of the firm. After digging a bit more, I found the following statistics that surprised me (Source: Hewitt Associates & Employee Benefits Research Institute and the Investment Company Institute): Â
- 40% of employees have at least 20% of their 401(k) in their employer’s stock.
- 16% of employees have more than 50% of their account in their employer’s stock.
- 9% of employees have 80% or more of the 401(k) assets in their employer’s stock.
There are several reasons often cited for holding significant amounts of company stock, including the following:
- Many employees feel their company’s stock is safer than a mutual fund.
- Employer matching contributions often come in the form of company stock.
- Employees want to invest in what they know.
However, our belief, and the message we communicate to our clients, is that if you do decide to invest in your employer’s stock, you should limit your holding to no more than 10% of your overall account balance. This will provide you with exposure to your company’s stock, but also give you the opportunity to properly diversify your account. If you hold more than 10%, you may want to consider rebalancing your account to increase your account’s diversification.
As a reminder to our clients, we advise you to revisit our risk tolerance questionnaire at least once a year to determine whether your recommended allocation properly reflects your current situation and risk tolerance. If you have any questions or comments, please feel free to contact us at 877-627-8401.
Buck Wendel, Investment Advisor
