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Too Much Company Stock Can Be Hazardous to a 401(k) Account

'Companies that look great today may not look great tomorrow. It is better for participants not to be overexposed in their retirement plans to company stock,' BrightScope founder Dan Weeks says.

September 1, 2012
Related Topics: Top Stories - Frontpage, Retirement/Pensions, Retirement Planning

Morgan Stanley employees must love company stock in their 401(k) plan, because they don't get out of it entirely when share values tank.

The New York investment bank uses its shares to match participant contributions. The 42,000 employees in the plan get $1 in stock for every dollar they contribute up to 4 percent of pay or a maximum of $10,000. Employees can transfer the shares into any of the 34 investment options in the plan.

The plan had about 16 percent of net assets in company stock in 2011, a company representative says. That is down from its 2010 federal filing showing 24 percent in company shares. Since August 2009, Morgan Stanley shares have dropped about 65 percent, to $14, from about $40.

"It's a personal investment decision," Morgan Stanley spokeswoman Sandra Hernandez says. "There are other investment options in the 401(k) plan."

Despite a drop in the number of companies offering their shares as investment options in 401(k) plans, and more than a decade after the former Enron Corp. lost billions in retirement dollars after loading up on company stock, the option is still highly used when offered.

BrightScope Inc., the San Diego-based ratings service, took an exclusive look for WorkForce Benefits at 401(k) plans with more than $100 million in net assets in its database and found that 9.9 percent of the 52,000 plans that the company tracks offer company stock. That's down from 11 percent in 2009 and hovers at 10 percent from 2008.

Of those plans offering company stock in 2010, about 66 percent hold more than 10 percent of net assets in company shares. The average was 33.92 percent, BrightScope numbers show.

Putting retirement assets in company shares shows workers have a lot of faith in their companies, but it also means workers may not understand the risk associated with investing in one stock, says Dan Weeks, founder and chief operating officer at BrightScope.

"Companies that look great today may not look great tomorrow," Weeks says. "It is better for participants not to be overexposed in their retirement plans to company stock."

The 2001 Enron collapse showed how retirement assets can disappear virtually overnight. The energy giant matched employee contributions in stock and barred employees from divesting until turning 50. When the Houston company's unethical accounting practices were revealed, Enron shareholders—many of whom were workers with retirement accounts—lost billions of dollars.

As a result, Congress made changes to federal law. Now it's easier for participants to sell company stock and to be more diversified. A 2006 law requires plan sponsors to notify participants holding 20 percent or more of one asset that their retirement plan my not have enough of a mix to manage investment risk.

While the law also allows plan sponsors to limit the amount of company stock employees can hold in their 401(k) accounts, many in the industry would like to see these shares gone altogether.

"You should never have undiversified risk in your portfolio. Holding any single security is way too risky," says Robyn Credico, defined contribution practice leader at Towers Watson & Co. in Arlington, Virginia. "And in putting a cap [on company shares] doesn't get rid of the risk, it only limits the extent of the liability."

Steve Clark, treasurer for South Jersey Industries Inc. agrees, but has had a hard time moving participants out of the Folsom, New Jersey-based utility company shares. The company's 401(k) plan was originally a thrift plan in which participants invested in company shares and treasury bonds. Today, there are 18 investment options, but few workers who started with the thrift plan have moved out of company stock. Nearly 77 percent of the net assets of the $139 million plan are in company shares, BrightScope 2010 data show.

South Jersey Industries' match is in cash—not company stock—and participants are required to attend financial education seminars. Those with three or fewer investments are given additional education, focusing on managing risk by improving asset allocation.

"The concentration [of company stock] is a topic of every trust meeting we have," Clark says. "We don't think it's appropriate to force investment decisions, but it is very, very important to continually educate participants."

The stock itself is giving participants very little reason to sell. South Jersey Industries' stock has outperformed the Dow Jones Industrial Average and Standard & Poor's 500 stock index for 10-year and five-year returns. It has mostly outperformed three- and one-year averages as well. For this year, the stock price is up 9.61 percent as of Aug. 7.

"This is their money and it's their decision," Clark says. "It is important to educate plan participants as to the risks and opportunities that are associated with the investments in plans.

"We think we've taken every step to encourage diversification," Clark says. "Participants still have the ability to make up their own minds on investments, and that's the plus and minus of the 401(k)."

Patty Kujawa is a writer based in Milwaukee. Comment below or email

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