Managing Employer Plans

Are You Over-Invested in Company Stock in Your Retirement Plan?

Be careful not to put too many eggs in your 401(k) basket

by Brian M. Rys, AIF, CFP, CLU, ChFC

Mr. Rys, is a financial advisor with Boston Partners Financial Group, LLC. He can be reached at 508-520-2598 or Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Advisor. 138 River Road, Suite 310, Andover, MA 01810. Boston Partners Financial Group, LLC is independent of Signator Investors, Inc. and any affiliated companies. This information is provided as general guidance and is not provided as legal, tax or investment advice to the questioner’s situation. Individual situations vary. Please consult your tax, legal or financial advisor for more detailed information and advice.

Part II in a two-part story

Financial advisors tell their clients to save as often and as much as possible for their future retirement needs. Taking charge of your finances early allows you to make thoughtful decisions about your future and your long-term security.
One of the first options many investors will utilize is making contributions to their employer-sponsored retirement plan, such as a 401(k). Since your employment income is dependent on the company, having too much of your savings in company stock inside or outside your 401(k) may cause you to be too concentrated in one place.

From a diversification standpoint, you would not want “all your eggs in one basket.” There are many historical case studies and examples to prove this point.

So, how do you protect those gains?

Over the last several years, those of us who have participated in the stock market have seen some excellent growth in our accounts. With markets reaching new all-time highs at different periods over the last year, what tends to be on the top of everyone’s minds is how do I protect the gains I have achieved so far? We all know that markets cannot go up forever, as demonstrated by some brief corrections this year. The longer we go without a pullback in the market, the closer we are probably getting to a recessionary environment.

it is more important than ever to take a look at your allocations and make sure you are comfortable given your time frame and risk tolerance

Given that, it is more important than ever to take a look at your allocations and make sure you are comfortable given your time frame and risk tolerance. Rebalancing a portfolio, say once per year, can help take some profits off the table in a rising market to help protect what you have gained. On the other hand, if markets are falling, a basic rebalance can help allocate more to the investments in your portfolio that may have fallen, taking advantage of lower prices. After all, if given the choice, most people would prefer to buy things on sale versus full price. The point is that as long as you don’t have a very short time horizon on when you need to start taking an income from your investment accounts, these types of market corrections, as we saw earlier this year, can be opportunities and often times do not have detrimental impacts to the long-term success of your plan. This brings us to company stock.

Some individuals have retirement plans through their employer where they have the option to allocate funds toward company stock…or the company may match your retirement contributions with company stock. It is important to keep track of the amount you may have invested or accumulated in your company’s stock. Diversification may help mitigate risk, and when left unchecked, you may find that the percentage of company stock you own in your retirement plan may possibly have grown significantly over the last several years. Single stock investments like company stock could be very risky, especially in times of enhanced market volatility, as we are seeing now.

It is important to treat company stock as you would any other asset class in your portfolio and rebalance it as needed. Remember, your investment in your company is not just the company stock you own; it is also your employment there, meaning the income you earn. If anything ever goes wrong with the company you work for, you don’t want to be over exposed in the amount of company stock you own in your retirement accounts. ◊


See part I here.