What’s In the Mix of Your 401k?
Lee Rosenberg, CFP | July 22nd, 2009Many public corporations issue stock purchase plans for their employees. Others have a match program where for each percentage that the employee contributes, the company will deposit an equal percentage of company stock into their retirement account, sometimes at a discounted rate.
In years past, we have all heard the tall stories about the average Joe getting to retire rich on company stock. Now the more likely scenario is hearing how retired employees are getting wiped out by company stock from the likes of Enron, Lucent, Bear Stearns, Citibank and the airlines among others. Given this rocky period, the question is how much company stock SHOULD you own?
Putting all of your eggs into one basket has never been a sound investment strategy, and today it means taking greater risk, but what percentage is too much? Reports indicate that many employees are holding as much as 10% of company assets in their retirement accounts, which is very high. In comparison, mutual fund investors would be limited to holding no more than 5% of any one company in a fund, and usually it’s kept an average of 2%.
The other consideration is that many corporate pension plans are actually prohibited from holding more than 10% in company stock, so why should you? This is especially true if your company is struggling because both your paycheck and your retirement accounts are dependent on their economic health. This means greater exposure of risk.
Another possible outcome is caused by an opposite effect. If your company’s stock has grown in value or behaves so well that you surrender to temptation to buy more, it increases the percentage of your net worth invested in this single asset.
Either way, this is the time to practice both risk management and asset allocation with your portfolio and to balance each position, offsetting any additional risk that you can moderate with sound asset management.
For example, we are urging our clients to reduce their company holdings to no more than 5% of their portfolio, but you should discuss this with your financial planner and calculate an appropriate asset allocation for company stock.
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Tags: 401k, financial planner, investment strategy, lee rosenberg, retierment, retire, retirement, retirement accounts
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
