Ask Money

Company stock in 401(k)

Chris Farrell Mar 15, 2010

Question: I looked at my 401K for the first time in a quarter and noticed that my employer match stock amounts are a huge part of my overall value (38%). I’ve realized that it was due to last spring when stock was practically being given away at $8/ea before stabilizing the last few months in the high 20s. I’ve bought at prices $40 and $8 in the last year. I feel like I should unload some to get the percent down to ~25%, is that a bad idea? I’d like to lock it into a boring bond or time based fund. I’m 31, so 34+ years to retirement. Thanks to TARP dividends are very tiny. Chris, Ames, IA

Answer: I share your worry about having so much of your retirement savings in one stock. It sounds as if you work at a financial institution that got bailed out by the federal government so you know how fast savings one company stock can disappear. The most famous–no, infamous–illustration of the risk is Enron. Many of its employees invested a large percentage of their retirement portfolios in its once highflying stock. When Enron crashed it destroyed many of its workers’ retirement dreams. The good news is that more folks than ever have gotten the diversify message. According to the latest data from the Employee Benefit Research Institute, the share of 401(k) accounts invested in company stock was only 9.7% in 2008, down from 19% in 1996. (The latest comprehensive data is for 2008.)

It’s a good idea to reduce the percentage of your retirement portfolio exposed to company stock. I would definitely diversify. It makes no sense to tie both your current income and your future retirement income to the performance of one company. I’d even consider going down to 10%, which is a prudent benchmark. It’s enough of an exposure that you’d benefit if the company does well and not so much a percentage of your portfolio that your next egg would shrivel if the investment tanks.

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