Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Retirement Planning > Retirement Investing

Company Stock Equals Trouble

Your article was successfully shared with the contacts you provided.

Do your clients own company stock within their 401(k) plan? If they do then there’s a good chance they’re taking more financial risk than they know.

Even though their company’s stock may have done well historically, what happens if the company begins to falter? Who’s to blame for too much company stock stuffed inside 401(k) plans? Is it employees? Is it the employer? Or is it the 401(k) provider?

Let’s analyze these questions along with actionable strategies that can help you to reduce your clients’ risk regarding company stock within their 401(k) plans.

Advisor Defense

The traditional view of company stock is that it motivates employees to perform. And if they do, the corporation’s sales and earnings increase resulting in a higher stock price. It’s a win-win situation for everyone.

But what happens when the company’s stock implodes because of a scandal (see Goldman Sachs), a catastrophe (see BP), maybe fraud (see MCI Worldcom), too much competition (see Circuit City) or another unexpected adverse event? Employees suffer. And if they’ve unwisely overdosed on the company’s stock it could wipe out their retirement savings.

Therefore, the first line of defense in reducing the risk of owning too much company stock inside a 401(k) plan starts with financial advisors.

Generally, if company stock represents more than 50 percent of the total value of a 401(k) plan, the client is probably taking too much risk. And by diversifying into other investments within a 401(k) plan, like mutual funds that hold a portfolio of stocks and bonds, such clients can immediately cut risk. Help them to make the adjustments as soon as possible.

And if they still don’t listen to your good advice, at least they’ve been warned. Ultimately, the financial risk and responsibility for their retirement assets is on them.

The Employer’s Role

Employers don’t always look out for the best interests of their employees even though they should. This is especially true with stock ownership inside 401(k) plans, where the perception is that employers are helping their employees by giving them more and more equity in the company.

Stock ownership, depending on the company, can be both a blessing and a curse. The tiny percentage of employees that made their millions by investing in company stock are easily outnumbered by the thousands (maybe millions) who have lost.

In this regard, companies should be protecting both themselves and their employees. How? By imposing limits or restrictions on employee stock ownership within 401(k) plans. And if stubborn employees want to violate those guidelines, they can, but they first need to sign a waiver releasing their employer and 401(k) provider from any legal liability tied to losses should the company’s stock price fall in value.

These powerful preventive steps can reduce the corporation’s legal liabilities by keeping parasite attorneys who file class-action lawsuits on behalf of “cheated” employees far away. It will also help employees to understand they alone are responsible for their own financial outcomes, both good and bad.

Enter the Regulators

The Department of Labor and Securities and Exchange Commission have a dual responsibility to protect 401(k) participants. Shouldn’t these government agencies take immediately unified action to minimize the problems of too much company stock within 401(k) plans? How many more billions have to be nuclear bombed before something is done?

I believe the Labor Department and SEC should place immediate restrictions on stock ownership within 401(k) plans. And if mulish employees want to violate those guidelines, they can, but they first need to sign a waiver releasing their employer and 401(k) provider from any legal liability tied to losses should the company’s stock price fall in value.

All of this would minimize frivolous class-action lawsuits against employers who choose to offer company stock as an investment option within their 401(k) plan.

Likewise, this line of defense would also eliminate the possibility of 401(k) providers being dragged into unnecessary litigation. By having signed documents from employees acknowledging they agreed to exceed pre-determined stock ownership guidelines, they (employees and their desperate lawyers) have no one to blame but themselves when their equity falls in value. I think it’s the perfect solution to a complex problem.

In summary, company stock is rarely a blessing and more frequently a curse. Therefore, help your clients to comprehend that risking their retirement future on company stock isn’t safe, smart or prudent.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.