Many employers offer the opportunity for employees to invest in their company stock through their 401(k). It’s easy to find this as an attractive investment – after all, invest in what you know. However, millions of employees, knowingly or unknowingly, have a high concentration of their employer’s stock in their retirement accounts.
What’s the Risk?
Having too much company stock in your 401(k) means that your investments probably aren’t diversified. This could have an adverse impact on your overall financial situation if the company goes under for any unforeseen reason. Not only would your paycheck and benefits be gone, you would also lose a big chunk of your retirement nest egg.
Of course, you might be thinking, “I work for a good company, what’s wrong with having a large amount of my assets invested in their stock?” The sad truth is that nobody thinks this is going to happen to them until it does. Just ask former employees of once-great companies like Enron, Lehman Brothers, WorldCom, and Kodak.
Why is this the first time you’re hearing this?
You might be realizing that your 401(k) is overinvested in your company’s stock. So, why hadn’t you heard that this could be a problem before now? There aren’t any restrictions on how much company stock you’re allowed to invest your 401(k) assets in.
Unfortunately, because there are no restrictions on 401(k) company stock investments, almost 7% of Americans have 80% of their 401(k) invested in their company’s stock 😱. Even worse, 15% of employees in their sixties have over 50% of their 401(k) invested in their company’s stock. This puts pre-retirees in a situation where the majority of their retirement nest egg is entirely dependent on the success of a single stock – which isn’t an ideal situation.
So, How Much is Too Much?
Of course, there isn’t a one-size-fits-all solution to this investment question. Everybody’s situation is unique, and every company is different when it comes to stock performance.
Most financial advisors recommend that the total employer stock in your investment portfolio should be limited to 5-10% at most.
That may seem low – but it’s not. If you look at the big financial picture, your employer is already responsible for your paycheck and your benefits – putting them at the top of the list of ways you earn money. If you overdo how much company stock is in your portfolio on top of that, your employer officially is making up too large a slice in your financial pie.
What are the next steps?
Before you do any adjusting of your 401(k), let’s take stock of where you’re at emotionally first. If you own company stock, your company loyalty could be playing a large part in whether you’re willing to sell (or whether you feel compelled to buy more). Guilt absolutely plays a factor, and sound reasoning often gets put on the backburner.
Even if you’re usually very logical in your financial decision making, this is one area where you need to truly evaluate the motivation behind your investment decisions. You likely feel very comfortable with your company and the product/service they provide. After all, that’s why you work there, right? You may feel that they take good care of you, and you view the company stock you’ve been given the opportunity to buy as an extension of that. This is a dangerous mindset. Company stock is not a treasured gift that can’t be sold – it’s a tool to build your wealth and to help you live the life you want.
People often feel that they’re “cheating” on their company if they sell company stock. It sounds irrational right now, but it’s the truth. When an individual becomes too close to the subject of their investment, they don’t usually invest rationally. When you work for and invest in the same company – you lose perspective.
Now that you’re cognizant of the emotional connection you feel toward your company’s stock, you can either look at your portfolio yourself to see if you’ve overinvested or you can contact a professional financial advisor to help you see things clearly and rebalance. Sometimes having a third party there to help you makes all the difference.
Overinvesting in company stock can seriously harm your finances – whether it’s your day-to-day income, your retirement nest egg, or your long-term savings goals. Don’t feel emotionally compelled to keep the company stock you’ve been given. In many cases, they’re giving you too much because it benefits them – as is the case when their employer-match is given in company stock. You want to have a well-rounded financial life that affords you the opportunities you want both now and in the future. Making sure your 401(k) is well-balanced can help you achieve that.
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Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.