Workers Are Allocating Less for Employers’ Stock in 401(k)s
More people are cutting back on 401(k) savings investments in the stock of their employer, apparently heeding financial planners’ advice about having too big a retirement bet in one asset.
But at roughly 30% of the typical investor’s 401(k), the company-stock figure is still too high for comfort, many experts say.
Stressing basic portfolio diversification--and the risk that more major companies could suffer stock meltdowns on the scale of what happened last year to Dell Computer and Lucent Technologies--most financial planners recommend that an investor hold no more than 15% of 401(k) assets in his or her employer’s stock.
In the nation’s 1,000 largest defined-contribution retirement plans, sponsoring-company stock has fallen to 30.2% of assets, on average, from a peak of 35.2% two years ago, according to the latest survey by the trade journal Pensions & Investments.
Among the 200 biggest corporate plans surveyed, company stock is more prevalent, though even in those plans it has dropped to 35.5%, on average, from a peak of 41.2% in 1998.
The latest Pensions & Investments survey data are mostly as of Sept. 30.
Among all 300,000 of the nation’s 401(k) plans, other studies indicate that company stock represents about 19% of assets--which reflects that the vast majority of smaller plans don’t offer company stock as an option.
In a 401(k), workers contribute a portion of their pay to an investment account that is sheltered from taxes until the money is tapped during retirement. Many employers match all or part of the worker’s contribution.
Investment choices available in the plans usually include stock mutual funds, fixed-income accounts and, at many large companies, the firm’s own stock.
For some investors who have loaded up with company stock, last year’s vicious market demonstrated how sharply a lack of diversification can sting.
At Dell, for instance, about 88% of defined-contribution plan assets were in company stock at the end of 1999, according to the industry publication DC Plan Investing. Dell shares plunged 66% in 2000.
At Lucent, 48% of plan assets were in company stock before the shares tumbled 81% in 2000.
Mike Scarborough, an Annapolis, Md.-based advisor to individual 401(k) investors, said his firm was recently hired by a Lucent employee who watched his 401(k), all in Lucent stock, dwindle last year from $400,000 to $75,000.
“He was 58 and wanted to retire at age 60,” Scarborough said. “We had to tell him that, unfortunately, he would not be retiring at 60. We set him up with a diversified portfolio, but we’ll be amazingly lucky if we can get him back to where he was by age 70.”
“No single stock should ever represent enough of your portfolio to make or break you,” said Scott Leonard, a financial planner in Manhattan Beach. “It also makes a whole lot of sense to diversify your investment capital, meaning your portfolio, away from your ‘personal capital,’ or your ability to earn income. What if your company runs into trouble?”
Even some investors who have not been badly hurt by market volatility are coming around to the idea of greater diversification.
Fred Carter, a purchasing manager at Boeing’s Long Beach facility, has more than 70% of his 401(k) in company shares. For his first few years in the plan, he was exclusively in Boeing, but now he is putting just 5% to 10% of new investments into the stock, with the bulk going into growth-stock and technology mutual funds.
“I’m still an aggressive investor, but I decided to scale back on Boeing, since it isn’t good to put all your eggs in one basket,” he said. “I studied business in college, so I should have known better.”
But with about 20 years until retirement, Carter said he remains bullish on the company’s future, and when his Boeing stock allocation eventually drops to 40% to 50% of his plan assets he plans to step up purchases again to keep it there.
The shift away from company stock can be attributed to several factors, experts say, including expanded investor education; the growing use of third parties such as MPower Advisors and Financial Engines to provide independent, personalized 401(k) advice; company stock allocation limits imposed by some employers (to 25% of one’s portfolio, for example); and the expanding array of investment choices available in the typical 401(k) plan, which now has about 11 options.
While assets in company stock at the 1,000 biggest 401(k) plans have fallen in the last two years, the “other equities” category jumped to 40.1% of assets, on average, from 31.6% in 1998, Pensions & Investments said.
“For various reasons, the whole concept of diversification is starting to sink in with people,” said Murray McBride, a director with Deloitte & Touche’s advisory services group.
But some investors still view their employer’s shares as their smartest option.
At General Electric, whose stock has held up well, about three-quarters of defined-contribution assets were in company shares as of Sept. 30, according to Pensions & Investments. Bob Render, a GE appliance technician from Cypress, is among those who scoff at the experts who say loyal investors like him have blinders on.
The 48-year-old Render has about $412,000 in his 401(k)--with more than 90% of it in company stock--and hopes to retire at 55 with $1 million.
“GE stock has been awful good to me over the last 17 years,” he said. “I just can’t imagine it ever doing badly.”
Southern California-based companies with a high percentage of plan assets in company stock, according to recent surveys, include Sempra Energy, at about 61%; Avery Dennison, at 51%; and Walt Disney, at 45%.
Experts say company-stock ownership in 401(k)s remains high for several reasons: the unrealistically rosy view that many workers have of their own companies; “excessive extrapolation” based on past returns; plan rules that may require a minimum percentage ownership of company stock; and the “endorsement effect” of employer matches.
About a fifth of firms make their matching contributions in stock or a combination of cash and stock, though most match in cash alone.
“If you don’t know much about investing, you might naturally look for guidance from your employer,” said Shlomo Benartzi, a professor at UCLA’s Anderson School. “So, you might think, ‘If my company stock weren’t so good, why the heck would they be matching with it?’ ”
Employees also may have trouble objectively analyzing their company’s prospects, instead glossing over any potential problems, advisors say.
“This is an emotional decision,” Leonard said. “No one wants to step away and take a hard look at what’s happening with their company and their industry.”
And workers whose stock has doubled in the last three years, for example, might expect it to keep doubling every three years--rather than preparing for a period of potentially sub-par returns.
“Most investors drive by looking in the rear-view mirror, which is human nature, but it’s very dangerous,” Leonard said.
Advisors say employees should always consider their 401(k) allocations in light of their overall investment portfolio. If, for instance, company stock can be bought at a substantial market discount through an employee stock-purchase plan subsidized by the employer, then it may make the most sense to do that and invest 401(k) monies elsewhere.
Despite the experts’ advice, some workers who have loaded up on company stock have seen their big bets pay off.
At Abbott Laboratories, for example, more than 85% of defined-contribution assets were in company stock last year, according to DC Plan Investing. Abbott shares climbed 33% in 2000 while the broad market fell.
Render, who maxes out his 401(k) with 15% of his pay going into GE stock (the most he is allowed to allocate to the shares) and 2% into savings bonds, said that, as a giant firm with varied businesses, GE already offers a degree of diversification.
“My feeling is that to own a piece of GE is to own a piece of the world,” he said.
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Stocking Down
After rising for most of the 1990s, company stock has shrunk recently as a portion of assets in large 401(k) and other corporate defined-contribution pension plans. Here is the average weighting of sponsoring-company stock in the 1,000 biggest company plans, according to a recent survey.
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Pctg. of corporate defined-contribution assets in company stock
2000: 30.2%
Data are from Sept. 30 each year.
Source: Pensions & Investments magazine
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Betting on the Franchise
Investors in the average large defined-contribution retirement-savings plan (mostly 401[k] programs) had 30% of their plan assets in the sponsoring company’s stock as of Sept. 30, but the percentage was much higher at some firms. A sampling:
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Pctg. of plan Company assets in company stock Abbott Laboratories: 85% General Electric: 75 SBC Communications: 65 Kimberly-Clark: 59 Qwest Communications: 53 Bank of America: 46 Walt Disney: 45 Edison Intl.: 29 Boeing: 19 IBM: 16 Delta Air Lines: 12 Eastman Kodak: 7
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Source: Pensions & Investments magazine
