Recently I had a reader ask me about having his company stock in a 401(k). Although there are pros and cons to holding company stock within your 401(k), it’s definitely something companies shouldn’t abuse.
According to the American Enterprise Institute, 62% of the 401(k) assets of Enron employees at the end of 2000 were held in company stock. One year later, Enron’s shares fell from more than $80 to less than a buck. The lives of hard-working employees were irreparably damaged in the blink of an eye.
On a positive note, the AEI suggests that the percentage of 401(k) assets invested directly in company stock fell from 19% in 1996 to 9% in 2009. So while the situation is getting better, there are still many companies playing Russian roulette with their employees’ retirement accounts — many of them Fortune 500 companies.
In the same study that found that the percentage of assets held in company stock fell over a 10-year period through 2009 also found that 66% of 401(k) plans with more than 5,000 participants offer company stock as an investment choice.
Furthermore, those most likely to hold company stock are older workers close to retirement and least able to afford an Enron-like stumble. The AEI concludes that the best way to eliminate this problem is to prohibit company stock within 401(k) plans. That might be taking things too far, but certainly, companies that abuse the principles of diversification should be held accountable. Situations like Enron, while rare, should not be allowed to happen.
Enough with the background; let’s start naming names. Unscientifically, I’m going to look at Fortune 500 companies, scanning for 401(k) plans where company stock represents more than 10% of the overall assets. My reasoning for 10%: It’s often a threshold for mutual fund managers. Keep in mind that all of these figures are for the end of 2010. In the next couple of weeks the numbers will be reported for 2011.
At the top of the list is ExxonMobil (NYSE:XOM), with 66% of its $19 billion in assets invested in company stock. Only 12% of the assets are held in fixed-income or short-term investments. Considering how volatile oil prices are, this strikes me as entirely inappropriate for any type of savings plan.
Some 56% of Chevron’s (NYSE:CVX) savings plan is invested in company stock. In defense of Chevron, it guaranteed $1 billion in loans in 1989 so the employee stock ownership plan could purchase 14.1 million shares of its stock. After two stock splits, in 1994 and 2004, those 14.1 million shares are now 56.4 million. Back those shares out of the equation and the percentage falls to 23%.
General Electric (NYSE:GE) held 42% of its $19.2 billion savings plan in company stock, with fixed-income investments accounting for just 14% of its overall assets. Since GE’s total return over the past decade was negative 1%, compared to positive 4.6% for the S&P 500 Index, it’s safe to say the best interests of employees weren’t looked after.
Next up is Wal-Mart (NYSE:WMT), whose company stock represents 25% of its $13.8 billion in investments at fair value. That’s still too high, though far better than ExxonMobil. Approximately 50% of its assets are invested in target-date products, which is a good thing. A negative is the $1.1 billion in company contributions that accrue each year before being paid out every March. You would think a company the size of Wal-Mart could figure out how to do this more frequently.
I’m going to skip both ConocoPhillips (NYSE:COP) and General Motors (NYSE:GM). ConocoPhillips has recently split into two companies so whatever information comes out in the next couple of weeks is going to be somewhat irrelevant. In GM’s case, I’m having a tough time locating current information. However, its savings plan for salaried employees held just 7.3% of the $20 billion in assets at the end of 2007. In GM’s situation, the deterioration of its business was a big factor.
Economist Lisa Meulbroek says it best: “Because employee investors earn exactly the same returns as fully diversified investors but are exposed to greater risk, holding company stock is inefficient for all employees, irrespective of their risk tolerance.”
Do yourself a favor and ask for company-match contributions in cash. Your employer won’t like it, but it’s not your employer’s retirement that’s at risk.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.