Loading up on employer stock may sound like a safe option, but did you know it can be incredibly risky? Find out more from Fisher Investments.
In 2001, Enron was proven a house of cards and the stock value crumbled, tragically taking an estimated 60% of Enron’s 401(k) plan assets with it. Enron employees, most far removed from the hijinks of the executive suite, were left out of work and with ravaged retirement plans.
The impacted employees’ plight was front-page national news, even years later, but before presuming this ended the perilous practice of loading up on employer stock, consider: In 2008, financial professionals working at Lehman Brothers had the same problem, and, more recently, RadioShack employees were unfortunately bitten again.
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It appears that when it comes to retirement planning, 100% investment in employee stock can be risky.
Now, to be clear, we understand executives frequently have little choice in the matter, as large parts of their compensation packages are tied to options or restricted stock. And we also know that sometimes employers match employee 401(k) contributions in employer stock (increasingly a rarity). Therefore, we understand you may not be able to totally eliminate your company’s stock in your retirement investment portfolio.
What to Do Instead
The experts at Fisher Investments agree that, to whatever extent you can, you should minimize your retirement assets’ exposure to your employer’s stock.
We believe you should limit exposure to any single company—particularly your employer—to at most about 5% of your total investments. Higher concentrations increase risk dramatically.
After all, if you are actively working, your salary should be tied to the business’s health. Tying your future wealth or retirement to its health by loading up on employer stock is essentially “doubling down” which is not ideal.
Maybe you don’t own the next Enron, Lehman or RadioShack, but if you load up on employer stock, the outcome needn’t be that extreme to do massive damage—the firm’s stock declining far more than a broadly diversified portfolio can hurt enough.
Maybe some retirement investors load up on employer stock on the presumption they know the company in and out. Maybe they do! But even so, there are risks within and outside a business that could sneak up on them. Country-level risks like government rules, regulations or legislative change can blindside a business. Industry-level risks can similarly surprise. A change in broad market or economic conditions could also leave someone concentrated in employer stock high and dry.
Diversification is the key. It’s about staying humble—avoiding the potential for a big mistake. Concentrating in employer stock is the opposite: It’s taking twice the chance.
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