Survey: Reduce employer stock in 401(k) plans

Businesses that allocate higher than average amounts of employer stock to 401(k) plans tend to underperform those of their peers the following year, both in terms of relative performance and on a risk-adjusted basis, new research reveals.

Morningstar Investment Management discloses this finding in a report, “Employer Stock Ownership in 401(k) Plans and Subsequent Company Performance.” As a result of the findings, the paper argues against employees holding significant amounts of company stock.

The study attributes the underperformance of the portfolios examined to the fact they have a “large cap tilt” and a market beta of less than one (1). Translation: The portfolio’s stock generally moves in the same direction as, but less than the movement of, a particular benchmark, such as the S&P 500 index.

This contrasts with a beta of less than zero (preferred by asset managers seeking a well-diversified portfolio), signifying an asset that moves in the opposite direction of a market benchmark. Inverse exchanged-traded funds and short positions on stock are examples of investments with betas below zero.