The Financial Industry Regulatory Authority (FINRA) has issued a warning to those who have or may concentrate too much of their retirement savings in their employer’s stock. FINRA wants investors to realize that should their company’s stock fall in value so will their portfolio. The greater percentage that you have invested in your company’s stock, or any one company’s for that matter, the more you are at risk.
There is not a restriction on the amount of 401K assets that can be held in a company’s stock. This is unlike the Employee Retirement Income Security Act of 1974 (ERISA), which restricts pension plans from investing more that 10% in a company’s stock. However, FINRA warns that despite your ability to invest it all in your employer’s stock you should diversify and lessen your portfolio’s dependency on just one company’s stock.
A study, which was performed by the Employee Benefits Research Institute and the Investment Company, found “that almost 54% of employees who have the opportunity to invest in their company’s stock do so.” According to this same study, of employees in there sixties almost 19% have more than fifty percent of their 401K invested in their company’s stock. Further, 11% have more than 90% invested in their company.
It must be remembered that a non-diversified portfolio that relies to a significant extent on the performance of one stock can be dangerous. Remember Enron? When your portfolio rises and falls with a singular company, all can be lost in one moment. Many individuals look at investment in their company as a showing of loyalty. However, when a company fails it is not likely that the company will return the favor and loyally assist their employees in recovering their 401K losses.
It is said by financial experts that an “adequately diversified portfolio” should not have more than 10%-20% of the investments in company stock. However, of course, this number may fluctuate depending on your circumstances; therefore, you should always consult a professional for advice on how best to diversify your portfolio. FINRA recommends spreading your risk so that you protect the value of your portfolio when a single stock or market sector experiences a loss.
Additionally, individuals should keep in mind that stock purchases with your employer may come with restrictions. Often employer-matched stock has restrictions. For example, the employee who purchases such stock may have to hold on to the stock until they reach a particular age or until a specific date. This may increase your risk as well. You may not be able to sell a particular stock when you wish and may suffer significant losses as a result.
Remember that all companies will experience gains and losses. Therefore, you should not put all your eggs in one basket, even with the company that pays your salary. Diversify!