Do Career and Employer Stock Mix?

Jul 31, 2012

You get a paycheck and nice benefits from your employer. You invest in your employer stock through your 401(k) or via options and grants. Are you putting too many eggs in one basket?
 
Nearly 25% of employees over the age of 60 hold 50% or more of their 401k assets in company stock. In addition to providing their current salary along with medical and other benefits, there may also be a retirement pension that is dependent on the employer’s future financial stability.
 
Question to consider: Are you putting your family’s current and future financial security at risk through your dependency on your employer?
 

Salary and Benefits

When the economy goes through a tough period as it is today, employee wages and benefits are generally at the top of a company’s list for review. If severe actions are needed, jobs may be eliminated. If not eliminated, salary increases may be restricted or pay may even be decreased. We have also seen medical plans adjusted, sometimes requiring the employee to pay a larger portion of the premium. It is not uncommon for matching contributions to 401k plans to be suspended. Even long-term employees are not immune to these actions.
 
If the company also provides a pension, a negative financial impact on the company may put this benefit in jeopardy as well. Pension plans for current employees may be redesigned, generally making them less generous. Retirees may be offered a lump sum payment to replace on-going payments for life. A very undesirable outcome for a pension results if a company goes into bankruptcy and the pension obligation is taken over by the Pension Benefit Guarantee Corporation, where a cap is placed on pension payments.
 
Sometimes a bad economy can up-end everything you have come to depend on from your employer. Unless you are prepared, your family financial security can be put at risk.
 

Owning Company Stock

Many times, the longer you work at a company, the more confident you become in their long-term growth strategy and success. As a loyal employee, you believe that the company will always do well and its stock will always go up. It can be very natural to want to own your employer stock.
 
However, when an investment manager designs a portfolio for a client, diversification is always a top priority. In a stock portfolio, it is prudent not to own more than 10% in any one company. A concentrated stock position results in the movement of that one stock determining the value of the portfolio. Owning your employer stock as a significant portion of your portfolio is just as risky. While there may be some obligation for employees at specific levels within the company to own a certain quantity of employer stock, the challenge then exists to diversify away as much of the risk as possible. You don’t want to be blindsided when the value of your employer stock goes down.
 

What to Do?

It is hard to know if the company you are working for will be financially strong in the future or be the next Enron. The 2007-09 financial crisis negatively impacted most employers. To protect yourself, build up an emergency fund equal to six months or more of your spending for living expenses. These funds will then be available if your pay is reduced or your job eliminated. This will provide you with time to make adjustments to your budget.
 
Keep your eye on the percent of employer stock that you own in relation to your overall investment portfolio. If you receive employer stock as the matching contribution in your 401k, then invest your contributions in other areas offered by the plan. While receiving stock from your employer as a grant or an option is always a nice benefit, be sure to include this when determining your overall portfolio exposure. If your portfolio is dangerously dependent on your employer stock, sell and reinvest as soon as restrictions lapse or you are otherwise able to do so. Keeping employer stock at the 10% level if possible is prudent advice. If you are unable to do this, be conscious of the overweighting and invest all available funding elsewhere.
 

Summary

Whether your employer will have long-term financial viability or not is something that most employees cannot control. It is in your best interest as an employee to understand the risk and take the necessary steps to protect your family’s financial security.

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