Don’t put all your eggs in one basket
Remember Enron? Workers that placed their 401(k) money into company stock not only lost their jobs when the firm went bankrupt, but much of their retirement savings. Almost two-thirds of employee 401(k) assets were in Enron stock worth $80 a share in January, 2001. A year later the value of its stock was $0.70 a share. A double whammy.
Lesson learned, right? Don’t put all your eggs in one basket, especially with company stock. The practice has declined since Enron. But it looks as if too many employees are still investing in employer in their 401(k)s, according to Alex Brill, former senior economist for the House Ways and Means Committee. Think Lehman Brothers and its 401(k) in 2007.
In The Case against Company Stock in 401(k)s for the American Enterprise Institute, Brill notes that 46% percent of 401(k) participants had company stock available to them in their plans. While 48% did not have any company stock in their 401(k)s (bravo), 28% held more than 20% and 5%owned more than 80%. Company stock also remains an option in many 401(k)s offered by employers with 5,000 or more workers.
Brill thinks the practice is too risky for a retirement savings plan. He’s right. Brill would ban it. Here’s the highlights of his reasoning:.
With the future of Social Security uncertain, retirees may have to increasingly rely on 401(k) plans for retirement security.
Many workers do not diversify their retirement accounts and invest heavily in company stock, exposing them to serious risk if companies should fail, as Enron did.
Policymakers can increase American retirement security by restricting employers from offering company stock in tax-preferred 401(k) plans.
The AEI typically doesn’t like calling for new regulations. Brill is spot on with this one. Management can always reward employees with company stock in their taxable accounts. But it’s a bad practice in a retirement plan.
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