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.
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