How Much of Your Company’s Stock Is Too Much?
Excerpts from Money Beat Blog: The Wall Street Journal
By Jason Zweig
July 15, 2017
The perennial question about company stock in 401(k) and other retirement plans is timely again. On June 15 and 16, shares in Kroger, the Cincinnati-based supermarket holding company, fell more than 26%, largely on the news that Amazon.com Inc. would expand in the grocery business by acquiring Whole Foods Market. With Kroger’s biggest retirement plans holding just under 28% of their assets in the company’s shares, employees lost about 7% of that collective nest egg in two days. It still hasn’t recovered.
The loss might not be permanent, of course. But such sharp, shocking losses are a reminder that investing where you work is riskier than it feels. Buying your company’s stock feels safe partly because of what psychologists call the illusion of control: the unrealistic belief that we can make the future conform to our wishes.
In retirement accounts organized as employee-stock ownership plans, contributions of company stock are partly tax-deductible to the employer. The company stock held by employees in 401(k) and other defined-contribution plans is typically contributed from the boss’s capital. That makes it feel like found money. And everyone has heard stories of workers at Berkshire Hathaway or Google or Microsoft becoming millionaires as their few initial shares burgeoned into a fortune over time.
Still, company stock bristles with a uniquely ruinous kind of risk: It’s most likely to plunge in price when your job itself is in jeopardy. Just think of the employees at Enron Corp. and Lehman Brothers Holdings who suddenly found their retirement plans wiped out and themselves on the street at the same time. Remarkably, according to the Plan Sponsor Council of America, less than one-third of employer-sponsored retirement plans that offer company stock limit how much employees can invest in it.
Many workers probably don’t want them to. In surveys of investors, behavioral economist Shlomo Benartzi found that only 16% to 33% felt their own company’s shares were riskier than the stock market as a whole. The belief that your job automatically makes you a corporate insider, with special insight on the future and perhaps even the ability to shape that future, is hard to shake.
But more than half of all companies, over the course of their lifetimes as publicly traded stocks, haven’t even outperformed cash. So putting most or all of your money in only one company, no matter how well you think you understand it, is risky. And putting most or all of your money in the company where you work borders on reckless.
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