(Bloomberg Business) — Investors are told again and again to diversify. By spreading their money out over hundreds of kinds of investments, they make their portfolios safer, if less exciting.
But do you know what’s going on in your own 401(k)?
Ten of the 50 largest companies in the S&P 500 still put 401(k) contributions in the company’s own stock, according to Bloomberg’s ranking of retirement plans, which is based on data filed last year. That earns those companies a deduction on the ranking.
It’s an “extreme example of poor diversification,” the behavioral economists Shlomo Benartzi of UCLA and Richard Thaler of the University of Chicago have written, echoing the warnings of many other economists and retirement experts. “Workers risk losing both their jobs and the bulk of their retirement savings all at once.”
The practice used to be even more common, by an order of magnitude. For decades, employees were nudged in various ways to put their 401(k) retirement plans into the company’s stock. Employers used to say it boosted productivity, despite studies that undercut those claims. And they touted tax advantages that Thaler and Benartzi call “exaggerated.”
Workers, who are rarely investing experts, took cues from their employers. If employers matched 401(k) contributions with company stock, as many did, employees took that as “implicit advice,” Benartzi and Thaler say. Even offering employer stock as a voluntary 401(k) investment choice could trip up novice investors who didn’t know they needed a more diverse portfolio.
The good news is that company stock is shrinking as a share of 401(k)s, so a bankruptcy or an industry downturn will hit many fewer American workers with that double whammy. Company stock holdings made up 11 percent of 401(k)s at the end of last year, data provided by Aon Hewitt show.
That’s less than half their concentration in 2005 and down from more than 30 percent in the 1990s.