401k Company Stock: How Much is Too Much?
By : Jeremy Sorci | February 2, 2020
Are you holding your employer’s stock in your 401k retirement plan? If your retirement account contains your company stock, you’re not alone: about 46 percent of eligible employees hold their employers’ stock, and one in five large companies invests employees’ retirement money in its own stock, says Bloomberg.
Including 401k company stock in your plan might not seem like such a big deal — especially if almost half of eligible employees are doing it — but the potential inherent risks have led some wealth advisors to call out the practice, with descriptions ranging from “the most hazardous holding” to “potentially devastating” to “a scary movie.”
What’s causing so many 401k advisors to warn against this admittedly common practice? To find out, you can ask former Enron or WorldCom employees… or simply read on to learn what you need to know about the potential risks of holding company stock in your 401k account.
Advisors Reveal the Risks of Holding 401k Company Stock
Though retirement and investing may seem like two different activities, they do share some underlying guidelines, namely risk and diversification. To understand why holding too much company stock in your 401k isn’t always a great idea, let’s expand on these two basic concepts:
- Avoiding unnecessary risk
- Maintaining a diversified portfolio
The increased risk associated with holding too much company stock is easy to understand. When you depend on your employer for your income and hold a large amount of stock in your 401(k) account, you’re exposing yourself to risk. If your company goes out of business, you will lose both your paycheck and a portion of your nest egg
Holding too much employer stock also means that your portfolio isn’t diversified. At Premier, we emphasize the need for true diversification, not simply across a range of equity securities, but across a range of asset classes, as well. If you’re sinking a significant chunk of your retirement savings into one company’s stocks, you’re not diversified. The old saying “don’t put all your eggs in one basket” certainly holds true in this case.
How Much is Too Much? 401k Advisors Weigh In
So is holding your employer’s stocks always a bad idea? After all, many companies encourage eligible employees to accept company stock as part of a 401k match plan. According to FINRA, while existing regulations prevent companies from investing more than 10 percent of their own stock into employees’ traditional pension plans, no such restrictions are in place for 401k plans. In addition, employer stock often comes with strings attached, potentially limiting liquidity.
However, in some cases, holding employer stock offer benefits like the opportunity to purchase discounted stock. As such, this issue lacks a one-size-fits-all answer. While some professionals advise holding 20 percent of your account in employer stock, most suggest five to 10 percent.
Take control of your retirement by setting maximum allocations of employer stock both in your 401k plan and total portfolio. If the stock price increases, consider selling and taking the opportunity to diversify. If you leave your company, consider using net unrealized appreciation rules; these distribute stock to a taxable account while doing a 401k rollover to a new account with the remaining funds. Speak with your trusted wealth advisor to determine the right solution for your needs.