No Shortage of Options
Stock Option Grants, Employee Stock Purchase Plans, Restricted Share Grants, 401k Plan Options, Outright Stock Grants, even Index Funds. There are a lot of ways for you to invest in your own company’s stock. However, is that really a good thing?
The Issue With Concentration…
You already work at your company. The salary you receive from your employer pays your bills, pays your taxes, and hopefully even pays for some entertainment. As a nation of investors, we are also betting the farm on the company’s performance paying for our investment gains too.
Consider the following… if you have an ESPP, you should definitely be investing in it, with all the money you can spare. You should accept all of your stock grants and options (of course!). However, many people are also putting money into their company through their 401k, and even through outside brokerages!
Don’t believe me? Take a look at this report from the Employee Benefit Research Institute. Companies with a stock option in their 401k attract 20.5% of the balance of those plans! It gets worse. According to the report, many participants were reasonable.
“Among these participants, 69 percent held 20 percent or less of
their account balances in company stock, including almost 46 percent who held none.”
The news quickly turns to the scary in the same section.
“On the other hand, nearly 8 percent had more than 80 percent of their account balances invested in company stock.”
Download the report… even though it is from December, the statistics are still fascinating.
Beware the Ides of Enron
EBRI did a study in 2002 on the attitudes of employees on company stock and defined contribution in the wake of the Enron collapse. In the pre-Enron world, many companies put more restrictions on when company stock could be sold in a 401k. Additionally, many companies offered the 401k match in company stock. Since then, the amount of employer stock has gone down. Walter Updegrave of CNN reports here on the issue, stating that in 1999 employees with the option invested a whopping 36% of their balance in their company shares.
How much did Enron affect the market? I would argue, not as much as it should. Since Enron fell, the Pension Protection Act was passed, which changed a number of aspects of how 401k plans are run (including better disclosure and automatic enrollment). Still, a 20.5% allocation? John Nofsinger, of Washington State University, has an interesting look at the effect Enron has had on investor psychology on his blog.
What to Do?
You’ve probably got a tremendous amount of your livelihood and well being invested in your company. You’ve probably even got a nice balance of stock and options outside your 401k. Since you rely on your company for so much, do you want to put this much more responsibility on it to perform? The next time you are allocating your 401k balance, choose wisely. You could listen to Walter Updegrave when he quotes 10% as a good target to shoot at. Of course, you are the master of your own financial destiny, so good luck!