Too much company stock in your portfolio?
By Laura Bruce • Bankrate.com

Too much of your company's stock may be bad for your retirement portfolio's health.

With a staggering economy, depressed corporate profits and increasing layoffs, you could lose your paycheck and watch your retirement nest egg get beaten down to nothing at the same time.

The Enron debacle is just the latest and most prominent example of what can happen when employees put too much stock in their companies.

Enron, one of the top Fortune 500 companies, fell from grace after announcing it had engaged in what experts call questionable financial dealings.

Enron stock plummeted and employees, who reportedly had been encouraged by the company to beef up their 401(k)s with company stock, saw their portfolios practically evaporate. One 54-year-old employee, who had $472,000 in his 401(k) and watched it drop to $40,000 in about six weeks, has filed a lawsuit against the company.

Lighten the company load
The Profit Sharing/401(k) Council of America says of companies with company stock in their 401(k) plans, including matches and employee purchases, the amount of company stock breaks down approximately this way:

• 35 percent of the employees have less than 10 percent company stock in their plans.
• 48 percent have between 10 and 50 percent.
• 18 percent have more than 50 percent.

Many financial planners recommend that company stock comprise no more than 15 percent to 20 percent of an employee's retirement portfolio, and that includes 401(k), ESOP and whatever other ways a company allows employees to buy its stock.

The dot-com tech bubble is an excellent example of employees loading up on company stock, losing their jobs and finding their portfolios full of worthless paper.

But a company doesn't have to go under for that to happen. Major swings in the economy, in a particular industry or even being on the losing end of a competitive battle can have a dire effect on the value of a company's stock.

"We see this happen many, many times," says Daniel Moisand, a certified financial planner with Optimum Financial Group in Melbourne, Fla.

"IBM in the early '90s -- they had all this great stuff -- everyone there was saying OS2 Warp is so cool. Well, yeah, but Microsoft had a thing called Windows that people actually bought. When things are going good, employees get excited and load up."

Many companies match employee 401(k) contributions with company stock. There's nothing wrong with that, but be very careful about purchasing any additional company stock.

"When we encounter clients whose companies are matching contributions with stock, we don't want them to put a penny in it unless they can buy it at a discount," says Moisand. "Your current financial health is dependent on this company. Now your future is dependent on it.

"If someone came into my office with a lot of cash, and I told them to put even 10 percent in one stock, they'd run out screaming. But when they work for a company, they get caught up in what's happening around them and they don't think about the consequences if they're wrong."

Like your company, love your 401(k)
Paul Sengmüller, a doctoral candidate at Columbia University, is researching 401(k) plans where employees voluntarily put their money, without any subsidy, into company stock.

"The ironic thing," says Sengmüller, "is you'd expect that when companies make their matching contribution in company stock, that employees would contribute less of their own money to company stock.

"But, in fact, the opposite is true. In those companies, on average, employees contribute around 8 percent more to buy company stock out of their own savings."

Scott Kays, a certified financial planner and author of Achieving Your Financial Potential, says the desire to load up on company stock often stems from greed or a false sense of knowledge.

"A lot of people feel that because they work for a company they automatically know the inner workings, which isn't true. Also, people get greedy. One option does extremely well, whether it's the company stock or an aggressive mutual fund, but especially with company stock, and they violate a basic rule of investing -- diversification."

Sengmüller agrees, and cites the example of Motorola employees who, he says, protested when they weren't allowed to contribute more than 25 percent toward company stock.

"They look at the past returns of the company, the company has been doing well, they want to buy more stock," says Sengmüller. "That's wrong."

Sengmüller says it's fine if companies want to match contributions with company stock, but he doesn't think company stock should be among the choices to purchase in a 401(k) plan.

Educate yourself
David Wray, president of Profit Sharing/401(k) Council of America, takes a different view, but cautions employees to do their homework.

"Some people have made a tremendous amount of money by being invested in company stock. There's no set answer as to what's good or what's bad. But it's important to evaluate the return on a company stock the same way you'd evaluate any other 401(k) investment."

Some experts say educating employees about their investment options is probably the best way to keep people from acquiring too much company stock.

Gloria Della, a spokeswoman for the U.S. Department of Labor, Pension and Welfare Benefits Administration, says the Retirement Security Advice Act that Congress is considering may help. The bill allows employers to make investment advisers available to employees.

"We, as individuals, may have control of our investment and retirement money, but we may not be the smartest ones to do it," according to Della. "Some people want someone to tell them what to pick from the choices they have.

"The advice bill is designed to remove the barriers against employers contracting with someone to give advice. Right now, employers can't do the allocation part. We want to make it so it's not a conflicted scenario, so it flows on an individual and personal scenario."

Della also says it's very important for employees to read the 401(k)'s summary plan description. A copy is given to employees when they join the plan. If you've lost yours, the person or company that administers your 401(k) plan can give you a new copy.

The summary plan description explains what your retirement plan provides and the rules that govern the plan. If your company provides a matching contribution, it explains what form the match takes. If the match is in company stock, it explains any restrictions concerning selling the stock.

Even if you have carte blanche to get professional investment advice, it's always a good idea to educate yourself about any investments you're considering, and remember: One of the best defenses against a shrinking bottom line is diversification.

-- Updated: March 20, 2003