When you first invested in your company’s 401(k) plan, you had to select from a variety of investment options. Most likely, your company stock was the only option you knew anything about.
After all, you work there and know the company’s ins and outs. That comforting familiarity can breed a deceptive feeling of safety. Unfortunately, that’s exactly why a lot of people get into trouble with their retirement savings.
The truth is that company stock — any company’s stock — is one of the most volatile and high-risk investments in your 401(k) plan. While mutual funds or Exchange Traded Funds (ETFs) are made up of a variety of other investments to diversify their risk, company stock risk is highly concentrated on the performance and prospects of a single firm. Mutual funds don’t go bankrupt, but individual companies go out of business all the time. In recent years, companies like Enron, MF Global, Bear Stearns, and WorldCom have shown just how fast a highly regarded company can fall from grace, leaving investors (and often employees) to pick up the pieces.
According to a 2010 Financial Engines study, nearly a quarter (23%) of 1,386,730 401(k) participants assessed in the study hold more than 20% of their 401(k) portfolios in unrestricted company stock. While that may not seem like a lot, that concentration — and the risk associated with individual stock —can significantly reduce portfolio growth rates over time compared to portfolios invested in more diversified options.
Avoid the company stock double whammy.
To make matters worse, if you have a large amount of retirement money in your employer’s stock and bad things happen to your industry or your company, you could get hit with the dreaded double whammy. No one wants to lose their money invested in the stock and their job as well. If your company does poorly and you lose your job, that is bad enough. “Don’t make the mistake of losing the retirement money you’ve invested in your employer’s stock at the same time.”
Take a moment to review how much company stock you have in your 401(k). As a general rule, most investment professionals recommend that people hold no more than 10% of their portfolios in company stock. If you have more than that, now might be a good time to consider diversifying your holdings to a more appropriate level. This is particularly true for older employees, who do not have the time to recover if their retirement savings take a big hit.
Some people mistakenly feel that taking money out of their company stock is somehow being disloyal to their company. Nothing could be further from the truth. Diversifying your 401(k) portfolio is not being disloyal — it’s simply putting your retirement security first, and not even your employer could argue with that.