Too Concentrated in Employer Stock?

Continuing my review of the series of ESOP articles in the Wall Street Journal, Overdosing on Your Company's Stock is a post on the Wall Street Journal's Independent Street Blog that discusses the problem of being too concentrated in employer stock. The post follows up an article discussing how an ESOP company diversified a portion of its ESOP Assets.

EBRI Study

The post cites the 2006 EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which is also discussed in Decreasing Share of Company Stock in 401(k) Plans, and states "that among participants in 401(k)s where employer stock was offered, 9% held more than 80% of their balances in the stock." For a more complete picture, here is the exact language from page 26 of the report:

Distribution of Participants' Company Stock Allocations by Age

Participants' allocations to company stock remained in line with previous years. Forty-seven percent (or 9.3 million) of the 401(k) participants in the 2006 EBRI/ICI database are in plans that offer company stock as an investment option (Figure 22). Among these participants, 67 percent hold 20 percent or less of their account balances in company stock, including almost 45 percent who hold none (Figure 32). On the other hand, nearly 9 percent have more than 80 percent of their account balances invested in company stock.

Enron

The post also cites Enron as a reason to be concerned about diversification:

At Enron Corp., nearly two-thirds of employees' 401(k)s were held in Enron stock in late 2000. The stock, selling then for $83 a share, plummeted while the financial scandal at the company unraveled. It was worth just pennies by late 2001, wiping out many employees' retirement savings.

An informative Q&A on Enron is available at Questions and Answers About Enron, 401(k)s, and ESOPs (Keep in mind that the article was written in January 2002 and, while relevant to the Enron discussion, will most likely contain references to dated legistlation, statistics, and other information)

Additional Things to Consider

Here are some additional items to consider that were not discussed in the post.

• Employees who work for an ESOP company generally receive more retirement benefits than employees of non-ESOP companies and usually have access to another retirement plan, usually a 401(k) plan, giving them an opportunity to diversify their retirement holdings.
  
• Since most ESOPs generally allows all full-time employees to share in the plan and are entirely funded with employer contributions, more employees are given a greater opportunity to benefit from the ESOP (than a 401(k) plan) without having to invest any of their own money. See Benefits of Participating in an ESOP, which highlights a NCEO discussion of a different EBRI study, for further analysis.
  
• Participants that are age 55 with 10 years of participation have a right to diversify a portion of their account balance, assisting them in achieving their diversification objectives.
  

Comments

The post contains some excellent comments worth reading. Here is a sample:

• "The 2006 Pension Protection Act did require that public companies with 401(k) plans or combined ESOP/401(k) plans requires that employers allow employees to diversify out of employer stock every quarter. Employees should take advantage of that. 401(k) plans should be diversified. Remember, though, that applies to all investments, not just employer stock.
  
  In a private company, if you have an ESOP, you can diversify when you have 10 years of participation in the plan and are 55 or older. More important, almost all ESOPs also have 401(k) plans that have no company stock in them, so make sure you put as much as possible in that plan to provide a buffer if company stock in the ESOP declines. Overall, however, ESOP participants have about three times the retirement assets, and about as much in diversified assets, as comparable employee sin non-ESOP companies." - Comment by Corey Rosen, National Center for Employee Ownership
  
  
  
• "What Kelly Spors fails to explain (perhaps she just does not understand) is that ESOP benefits at closely held companies are typically provided by the employer at no financial cost to the employee, as an added fringe benefit. The ESOP is fully invested in company stock and operates alongside a 401k plan, which usually does not permit any investment in company stock whatsoever. So let me give you this example: Joe Jones can go to work for Acme,Inc. and earn a good salary as a welder, say $75,000, save $20,500 a year (he is over 50) in the Acme 401k plan in a diversified portfolio with no company stock, AND participate in the Acme ESOP where he gets another $25,000 worth of Acme stock credited to his account each year for the 10 years of the ESOP loan. Is this a bad deal for Joe? Should he turn down the job at Acme becuase he does not want to be so heavily invested in company stock? I guess Joe, if he felt so strongly about it, could waive his right to participate in the ESOP, to avoid the risk of large losses there, and only invest in the 401k plan….. Of course, if he did so, he would be walking away from a $25,000 employer contribution each year for 10 years. Does this make good financial sense? Obviously it does not make sense and any financial planner who suggests it does is quilty of professional malpractice. There are many workers who have gotten a "piece of the rock" through their Company ESOP, who did not have to risk a dime of their own money on company stock. Why worry about risk if the investment was free to begin with?" -
  Comment by Rick Mapp
  
  
• "Diversification is an important investment strategy. One must remember, however, that meaningful wealth does not accumulate by spreading the little bit of money that an average pay employee can spare into a multitude of disconnected investments. In the U.S., there is a long history dating back to the mid-19th century of corporations providing stock to employees; in fact there is no nation in the world that has ever equaled the amount of shared ownership by employees of the companies where they work. No one will deny that a minority of companies with significant share ownership have gone belly-up, and this is why current law provides for diversification opportunities in company stock plans for employees; but at no time since the mid-19th century has a significant number of U.S. citizens lived in dire financial straights because they were owners in the companies where they worked. In fact, the overwhelming data shows that the vast majority of former employee owners have more wealth than those who were not employee owners, as the data, with ESOP companies at least, demonstrates that they are higher performing companies in all economic measures than companies that are not employee owned. In a capitalistic society, there is no higher economic position than owner. No ownership model is perfect; capitalism is not perfect. But before worship at the altar of diversification snuffs out company stock
  ownership, one should take a rational look at the macro evidence." - Comment by J. Michael Keeling - The ESOP Association
  

Poll

The Wall Street Journal conducted the following poll: If you could buy stock in the company you work for, would you? Approximately 2/3 said it would be a good investment.