Practical Cents #7: Rethinking Company Stock in Your 401(k)

Hello everyone and thank you for joining me today. When working with clients at publicly traded companies, we often see an inherent bias toward the stock as well, the ownership reflecting their loyalty and commitment to the work they are doing and the employer they are doing it for. I'm with you, we should all take immense pride in not only what we do, but who we work for as well. But does that mean you should also own your company's stock in your 401(k) plan? Your 401(k) is often your biggest financial asset, and one you cannot afford to mess up.

Which might lead you to think, "You're right, Cullen, and I work for a great company that has also been outperforming the broader market. Why wouldn't I own my company's stock in my 401(k)?" The real question is, why would you want to overexpose yourself to your company any more than you already are? Just think about it for a moment. Think about all the ties you already have to your company: your salary, how you put a roof over your head and food on the table, your healthcare benefits, how you and your family are covered in case of emergency, your retirement plan, your ability to contribute to a 401(k), your company match, perhaps even your pension. And just like any other investment, there will be ups and there will be downs, too. And what's important to reiterate is that when a company's stock price declines, it usually doesn't occur in a vacuum. There are other significant impacts that occur, one of them being layoffs.

Take a trip with me down memory lane to the year 2000, where we visit a company called Enron, whose share price hit record highs that year, only to have one of, if not the biggest, accounting scandals in history. And just a little over a year later, the stock became worthless. Not only did over 20,000 employees lose their jobs as a result of this scandal, but a significant amount of their retirement savings was lost along with it, to the tune of the average employee having between 70 to 80% of their retirement savings wiped out due to company stock ownership in their 401(k). And for those of you saying you're cherry-picking the worst example here, what about Ford, Intel, AT&T? All major companies still in business, with share prices that still haven't gotten back to their peak 25 years later after the 2000 dot-com crash.

So, with much of your livelihood already tied to one company, can you truly afford to further concentrate your risk by owning company stock in your retirement plan? Now, for those of you that already have it and may be wondering what to do, or feel so strongly about owning some amount of your company stock in your 401(k) plan, let's talk. You don't need to go at this alone, and we'd be honored to partner with you in creating a plan to ensure you're not taking on undue risk through company stock ownership. Thanks for joining me.