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Nearly
a century ago, George Santayana,
philosopher and poet, wrote: "Those who
cannot remember the past are condemned
to repeat it." Sadly, this statement may
be proving prophetic when it comes to
the amount of company stock that people
put into their retirement plans.
It was not so long ago that
Enron employees who participated in
their 401(k) plan had invested about 58
percent of their 401(k) assets in Enron
stock when it lost almost all its value
during 2001.
Have things changed much
since then? Consider this: In plans that
allow company stock as an investment
option, 46 percent of participants hold
more than 20 percent of their account
balance in their company stock, and
one-sixth hold more than 80 percent of
their account in employer stock,
according to a study by the Center for
Retirement Research at Boston College.
You may like your company,
but like all stocks, it is going to rise
and fall in value. By putting too much
company stock in your 401(k) portfolio,
you might be taking on too much risk.
How much of your 401(k)
portfolio should consist of company
stock? Many financial experts recommend
investing no more than 10 percent of
401(k) plan assets into company stock,
but this figure is just a guideline.
When determining how much company stock
to put in your 401(k), ask yourself a
couple of questions:
How far away am I from
retirement? If you are starting out
in your career, you might feel justified
in having a larger share of company
stock in your 401(k) than if you were
planning on retiring in a few years. The
more time you have, the better your
chances of overcoming the short-term
downturns that will affect your company
stock. But if you are nearing
retirement, and you may soon need to
start taking distributions from your
401(k), you might not want to be
over-weighted with company stock.
What is the prognosis for
my company? This can be a tough
question to answer. If you look back
just a few years, most people would
probably say that some of the big,
well-known companies that are struggling
today would always be strong, solid and
profitable. And several years from now,
perhaps these firms will again be on
solid ground, but right now, the picture
is not pretty for them. So, as you
decide on how much company stock to keep
in your 401(k), keep your eyes and ears
open on what might be happening in your
company and in the industry to which it
belongs.
It can be risky to pack your
401(k) with a high percentage of company
stock, but if it is offered for free,
consider taking it. If your employer
offers shares of company stock as a
401(k) matching contribution, put in as
much as necessary to earn the match. But
after you receive it, see if you can
trade in the company shares for other
investments within your 401(k).
Diversification is the key.
Company stock can have a place in your
401(k) or other retirement plan. But you
also have to leave plenty of room for
the other investment accounts inside
your 401(k), including accounts that
contain stocks, bonds and other
securities. In short, diversify your
401(k) today. You will be glad you did
when tomorrow arrives. |
