The Dangers of Holding Too Much Company Stock
By now, we’ve all had plenty of time to consider what went wrong at Enron back in the mid 2000s. There’s certainly no debate about what has happened to Enron stock and its impact on former employees. Almost 60% of the employee’s 401(k) money was invested in Enron stock when it tanked. So have the rest of us learned anything from this fiasco?
Apparently not, based on a multitude of surveys that have come out since Enron. A year after the Enron implosion, almost 95% of the assets in Procter & Gamble’s employee retirement plan were in company stock. A later survey from the Boston Research Group indicated that average 401(k) participants had 30% of their assets in company stock. One third of these participants had 50% or more of their assets in company stock.
And back in 2008, a Financial Engines research report indicated 36% of 401(k) participants still had more than 20% of their assets in their employer’s stock. Is there a problem with such high concentrations of company stock? Yes!
Most financial advisors recommend putting a maximum of 10% in your employer’s stock (okay, maybe 15% if you’re really, really confident in your company’s future). You already depend on your employer for your income, probably your health benefits, and maybe some other benefits as well. So placing an additional big bet on your employer’s stock (by holding a high percentage of it in your company’s retirement plan) is putting a lot of eggs in one basket. One bad step (like Enron took) and your financial house is in ruins—literally.
So why do we take the risk? As employees, we feel like we have a unique perspective on our company. We think we know what’s going on (for the most part), and we know about the new or improved product/service/gizmo that’s going to make our company’s stock take off. We think we know something our neighbor across the street doesn’t know, and somehow that knowledge will benefit us.
Well, here’s a news flash: we don’t know anything special about our companies (sorry). The folks on Wall Street know it already (and have probably known it for a few months now). Lots of Enron employees probably thought they had good information (and good reason to hold so much company stock). But they were wrong, and it cost many of them dearly. What will you learn from their experience? What’s in your retirement portfolio?