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June, 2010
When is Corporate Stock Too Much of a Good Thing?

Would you invest all your assets in one stock? While most investors understand the wisdom of not putting all their eggs in one basket, that's a lesson many corporate executives fail to apply to their 401(k) dollars. Many tend to be overly concentrated in, and overly attached to, the stock of their own company.

Think about your own situation. You may think that the normal rules of diversification and risk management do not apply to your company stock because you believe you have a better feel for the prospects of your company than do research analysts. Additionally, you may feel an emotional attachment to your company stock because you have contributed to your employer's success. You may also feel pressure from corporate management not to sell the stock.

Yet diversification, an investment strategy of spreading assets among different markets, sectors, industries, and securities to spread the risks and protect the value of your overall portfolio, is particularly important to a successful 401(k) plan. Even if your company's stock price is on the rise, the risks resulting from a lack of diversification may not be worth the potential gain. That is, if your company hits hard times, the combination of its stock sliding in price and your job becoming less secure puts you at greater risk than if you had your retirement assets invested elsewhere.

Not convinced? The fall of Enron Corporation illustrates the potentially devastating effect of owning too much company stock. There, 57.73% of employees' 401(k) assets were invested in Enron stock as it fell 98.8% in value during 2001.

So how much corporate stock is too much corporate stock? Experts generally agree that, ideally, company stock should account for no more than 10% of your 401(k) account. Yet, ironically, while the Employee Retirement Income Security Act of 1974 (ERISA) restricts traditional pension plans from investing more than 10% of assets in company stock, there is no similar restriction on 401(k) plans.

The good news, however, is the Pension Protection Act of 2006 has made it easier to diversify out of company stock if you do hold more than the recommended 10%. The new law gives workers the right to sell publicly-traded company stock received as a matching contribution in their retirement plan account after three years of service for original matching contributions, and immediately for employee contributions. The law also prohibits companies from forcing employees to invest any of their own retirement savings contributions in company stock. 

Perhaps in the wake of the Enron disaster, employees are beginning to see the light. According to "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2005," a report published in August 2006 by the Employee Benefit Research Institute (EBRI), 59% of 401(k) participants in the 2004 EBRI/ICI database who participated in plans that offer company stock as an investment option hold 20% or less of their account balances in company stock. Although that is an improvement over previous years, 11% still have more than 80% invested in company stock.

The downward trend in company stock investing is particularly notable among recently hired 401(k) plan participants. According to EBRI, less than one-half of recently hired participants who are in plans that offer company stock as an investment option actually hold it, compared with 61% of recently hired participants in 1998.

So, do you own too much of your company's stock?

Do the math. Remember, your total exposure to company stock includes not only stock you purchase, but also stock your company may give you as a 401(k) match, stock options, and pension plans.

Get real. If you find yourself hanging onto corporate stock because you believe a substantial rise in price is eminent, do a reality check by visiting the website Study the analysis of your company's historical prices to determine if your expectations are realistic.

Stay in the know. Monitor the changing restrictions, if any, on buying and selling your company stock. Additionally, reading your company's annual and quarterly reports as well as analyst reports and other information from third-party sources will help you to evaluate your company’s performance prospects. 

Make some changes. Rather than selling company stock in large blocks, it's often better to sell off smaller amounts on a regular basis, as you are allowed to. Think of your exit strategy as a sort of a reverse of dollar-cost averaging. Remember, diversification doesn't have to be an all or nothing proposition; it can be a gradual process.

Hedge your bets. If you have significant dollars tied up in corporate stock that you are unwilling to sell to diversify, you might consider hedging your position through a variety of specialized techniques.

©2010, Kelly Ruggles, Spokane, WA. Website | Sitemap | Disclosure
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly C. Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.