Why You Shouldn’t Hold Company Stock in Your 401(k)

by Kevin on March 18, 2013

Holding your company’s stock in your 401(k) plan seems to be a natural fit on the surface. Many people do hold company stock in their retirement plans, if only because the employer match may be provided by the stock.

If you’re contributing say 6% of your annual income to your 401(k) plan, and your employer is doing a 50% match at 3%, your plan will eventually contain an outsized amount of stock in your company.

That kind of arrangement could lead to problems.

Just because it’s your employer’s stock doesn’t mean it will be a winner

There’s sometimes a sense of having superior knowledge as it relates to your company’s stock. After all, you work for them and you’re familiar with the company. You probably have a sense of comfort in holding the stock as opposed to investing in companies you know nothing about.

But just because you work for the company, and you know them well, doesn’t mean that the stock will do well. How you feel about the company is purely emotional, and you should never invest money based on emotion.

Your stock AND your job could crash at the same time

This is probably the single biggest reason why you do not want to have a significant amount of stock in your company. If your company were to go through financial troubles of the kind that could threaten your job, it’s stock price will probably also be crashing.

The last thing you need with the threat of a job loss is a simultaneous drop in a major investment asset. That is an example of having too many eggs in one basket.

How would a major drop in the stock affect your attitude?

Maybe your job is not in jeopardy, but for one reason or another the company’s stock price gets hammered by the market. Should the stock price dropped by 70% or 80%, how might it affect your attitude as you watch your 401(k) plan drop by a large amount?

Few of us are ever OK with our investments dropping substantially. Were it to happen, it could cause you to change your view of your employer, and that may have an effect on your job performance.

Company stock may not fit within the portfolio you’re trying to build

A 401(k) plan is an investment portfolio, and one of the primary objectives with all investment portfolios is achieving a reasonable amount of diversification. That means having the proper balance and mix of various investment assets.

If 100% of the employer match is in the form of company stock, you probably have a very large percentage of your portfolio invested in that single stock. That isn’t proper diversification, and it may not fit with your overall investment objectives.

If you are looking to have a portfolio that is invested in a mix of growth stocks and super safe fixed income securities – and your company stock is neither – how does that work to strengthen your investment mix.

Too much of a good thing isn’t good for you

Let’s say that you absolutely love your job, and that your company is the greatest place on earth. That’s perfectly fine, go ahead and work there and have a blast! But if you are working for the company and you have a large amount of your 401(k) plan invested in stock of the same company…that’s just a little bit too much togetherness.

One of the main purposes for having investments, such as 401(k) plans, is for a safety net to insure you against a loss of employment. For that reason, your 401(k) plan should not be invested heavily in the same place that you work.

One of the reasons that companies offer 401(k) matches in company stock is to give the employee a sense of ownership in the company. That would be a real incentive if you work in a closely held company and were given a 10% or 20% share in the ownership of the company. If you work for a large publicly traded concern, a few hundred or even a few thousand shares of stock won’t give you much of a stake.

You can love your company for the environment, the people and the job that you do there. But owning stock in the company won’t necessarily sweeten in the pot. A certain sense of detachment, at least as far as your investments are concerned, will give you a proper distance. As the saying goes, familiarity breeds contempt.

Holding a substantial amount of stock of the company that you also work for is just a little bit too much familiarity.

Do you hold your company’s stock in your 401(k)? if so, how do you feel about the arrangement?

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