With the S&P 500 down 13.4% year to date, including dividends, through April 22, it’s a good time to revisit the sage financial advice that you should never put too much of your employer’s company stock in your retirement plan. Diversification matters.
In June 2018, professors Robert Pozen and Ming Liu wrote an article for Fortune with the headline, “Having too much employer stock in your 401(k) is dangerous. Just look at GE.”
The authors discussed how federal pension laws restrict the amount of company stock in a defined benefit plan to 10% of the plan’s total assets. However, that same rule doesn’t apply to defined contribution plans. Posen and Liu wrote at the time:
“38 percent of large companies with 5,000 or more employees offer company stock as an investment option for their defined contribution plan, according to the Plan Sponsor Council of America’s (PSCA) 60th Annual Survey of Profit Sharing and 401(k) Plans. However, according to this same survey, 36 percent of 401(k) retirement plans offering company stock do not limit the amount of plan assets in this investment option.”
A classic example is Stage Stages (NYSE:SSI), an operator of department stores in small and mid-sized towns. It has a Nonqualified Deferred Compensation Plan that the company established in 2002 to attract key employees to the company.
At the end of 2018, Stage Store stock accounted for 2.4% of the plan’s assets. SSI stock fell to 74 cents a share as of December 31, 2018. In 2019, executives bought 731,205 additional shares. Those shares represented 51% of the plan’s assets as of Dec. 31, 2019.
As I write this, the 1.1 million shares are worth $411,051, $2.5 million less than what the executives paid for the stock. Diversification matters, and these seven stocks might not be doing company employees any favors:
- Exxon Mobil (NYSE:XOM)
- Darden Restaurants (NYSE:DRI)
- Procter & Gamble (NYSE:PG)
- Hormel Foods (NYSE:HRL)
- Walmart (NYSE:WMT)
- Marsh & McLennan (NYSE:MMC)
- General Electric (NYSE:GE)
I’m highlighting these stocks given their high prevalence in employee retirement plans and potential for losses in the near- to mid-term.
Too Much Company Stock: Exxon Mobil (XOM)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 43.4%
I haven’t been a fan of Exxon Mobil for some time. I believe that while we still need oil and gas for the foreseeable future, fossil fuels inevitably will become irrelevant in a world full of clean energy.
That’s why in mid-March, I said “Investors Shouldn’t Touch Exxon Mobil With a 10-Foot Pole.” Some took offense to my argument and told me so in emails. I’m a big boy; I can take it.
The sad part is, I’m sure the vast majority, if not nearly all, of Exxon Mobil employees are wonderful, hard-working people. I don’t wish them any ill will. Yet it appears the company and its board are doing them a major disservice by allowing such a ridiculously high weighting of XOM stock.
I’d love to be able to figure out the cost basis for the 111.9 million Exxon shares that were held by employees in the company’s savings plan at the end of 2019. Of course, the company is quick to point out that cost information is not required because they are participant-directed investments. Lucky for them.
However, what I can do is look back to the end of 2016, when Exxon’s stock was trading above $90 and near a five-year high.
On Dec. 31, 2016, the Exxon Mobil savings plan held 129.3 million shares of the company that were valued at $11.7 billion or $90.26 a share. XOM stock accounted for 54.4% of the total assets. On Dec. 31, 2018, it held 111.9 million shares worth $7.6 billion or $68.19 a share.
Today, as I write this, those shares are down another 35%, with not much hope of getting back to $90 anytime soon.
As defined contribution plans overweighted to employers go, Exxon Mobil’s is one of the worst offenders.
Darden Restaurants (DRI)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 34.3%
Restaurant chains are getting hit by the novel coronavirus despite the fact many of them are still able to provide take-out, drive-thru, and delivery for their stay-at-home customers.
In February, before Covid-19 took hold, I recommended Darden along with nine other dividend stocks that had gotten off to a quick start in 2020.
Furthermore, in mid-April, I discussed how Darden was doing right by its employees. No, they aren’t perfect, but in an industry known for frugality when it comes to employee benefits, it’s better than most.
So, the fact that it has allowed the percentage of Darden company stock in the defined contribution plan to remain at such an elevated level is troubling.
Further, included in the liabilities of the plan are ESOP loans valued at $736,000. Here’s what the company says in its 11-K form:
“The Plan purchased Company stock held in the Darden ESOP Fund (Note 7) using the proceeds of the ESOP loans. There is currently one ESOP loan outstanding payable to the Company to fund such purchases. This ESOP loan is secured by a pledge of the purchased Company stock. As ESOP loan repayments are made, the ESOP Trustee releases the leveraged shares.”
The word “leverage” is not a good thing when the plan is extremely overweight in Darden stock. The company can do better for its employees.
Procter & Gamble (PG)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 32.5%
One of the most interesting aspects of the Procter & Gamble Savings Plan, other than the fact it has 10.6 million shares of PG stock that was valued at $1.16 billion as of June 30, 2018, is that in addition to various mutual funds, it also had $1.67 million worth of J.M. Smucker (NYSE:SJM) stock.
Why Smucker’s? The company bought Folgers coffee from P&G in June 2008 for $3 billion in Smucker’s stock. Since June 4, 2008, Smucker’s stock has appreciated 125%, while Procter & Gamble’s stock is up 82% in the same period. The employees who kept their stock were wise to do so.
Now, don’t get me wrong, based on the market value of the PG shares held as of June 30, 2019, and a cost basis of $618.9 million, the plan holders were ahead of the game at t
he end of fiscal 2019. However, at the market lows in mid-March, the company’s stock was trading below where it was in June 2019.
What would be telling is to go back over a few years to figure out how long some of these employees have been holding the stock. My guess is the annual return isn’t nearly as good as the mutual funds in the plan.
Having 33% of the retirement plan in P&G stock is a bad idea.
Hormel Foods (HRL)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 19.5%
This particular defined contribution plan is the Hormel Foods Corporation Tax Deferred Investment Plan A. As of Oct. 27, 2019, Hormel’s fiscal year-end, the plan had $903.5 million in total assets. Of that, 1,402,075 shares, or $138.1 million, were held in company stock.
In the previous fiscal year, the planholders held 1,533,604 shares in Hormel worth $153.4 million. This Hormel stock accounted for 17.8% of the plan’s $859.8 million in total assets.
If this plan had a 10% cap, the plan holders would have to sell 35% of their company stock. On Oct. 27, 2019, Hormel shares were worth $98.50. As of April 22, 2020, they were worth $48.42 a share, which represents a 51% loss in just six months.
It’s important to remember that this is a defined contribution plan and is meant to allow employees to put a certain amount of their pre-tax compensation into it where it can earn interest and capital gains on a tax-deferred basis until the funds are withdrawn from the plan.
In this particular case, Hormel matches 100% of an employee’s first 3% of their eligible compensation and 50% of the next 2%. But after that, employees are on their own.
Company Stock as a Percentage of Plan Assets (latest fiscal year): 12%
First, I just want to say that I most recently wrote about Walmart stock in February and considered it a stock to buy.
That said, I don’t see why a company of Walmart’s size needs to have 12% of its company stock in the $27.6 billion 401(k) plan. The Walton family already controls the company. There’s no need to be overweight in Walmart stock.
Now, I will say in the company’s defense, that it is the choice of the employee whether he or she owns company stock. Further, it doesn’t appear that the company provides any incentive to own its stock within the retirement plan, such as a discount to the current share price.
However, as the professors pointed out in the introduction, when only 14% of companies with more than 5,000 employees offer company stock as one of the investment options, does it really make sense for Walmart to be part of a group that’s getting smaller by the day.
Marsh & McLennan (MMC)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 9.7%
There are two ways one can look at Marsh & McLennan’s 401(k) and Investment Plan: The first is that as a company that provides strategic advice to other companies about their retirement plans ought to be a little more conservative about their own employees’ retirement planning. The second is that they ought to know how far you can push the limit without upsetting the apple cart.
When it comes to financial advisors, I’m not sure there are many who would be comfortable with their clients holding more than 10% in one stock, even if that stock was a tested and trusted name like Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B).
Like many retirement plans, the 11-K’s lag the fiscal year-end by about six months. Marsh & McLennan’s 2019 form ought to be out in mid-June. Later this year, I might revisit some of these plans.
Anyway, as of Dec. 31, 2018, the Marsh & McLennan stock held in its 401(k) Savings & Investment Plan was $415.4 million, or 9.7% of the $4.3 billion in total investments. The market value of the stock at the end of 2018 was $79.75 a share, 194.6% higher than the plan’s average cost of $27.07 a share.
You’re probably wondering why I’m picking on Marsh & McLennan when there are many much bigger violators, such as Procter & Gamble?
Well, when a company like Medtronic (NYSE:MDT) only has 8% of its plan’s assets invested in company stock, and isn’t literally in the businesss of retirement consulting, perhaps it’s time for Marsh & McLennan to reduce its employees’ exposure to its stock.
General Electric (GE)
Company Stock as a Percentage of Plan Assets (latest fiscal year): 8.7%
Although I’m focusing on firms whose company stock represents a higher percentage of an overall retirement plan, I’ve included GE to illustrate what can happen to planholders when they hold too much of one thing; in this case, GE stock.
GE files its 11-K’s in June, so we’re working off its 2018 numbers. GE’s fiscal year ends Dec. 31. At the end of 2018, there were 262.9 million shares of GE stock held by planholders worth $1.99 billion. That’s $7.57 a share.
A year earlier, GE planholders held 280.8 million shares worth $4.9 billion, or $17.45 a share.
In 2017, planholders sold approximately 17.9 million shares at prices between $7.57 and $17.45 a share. Go back to 2016 and you’ll see that GE stock was worth $10.6 billion at the end of the year and accounted for 36.4% of the retirement plan.
GE planholders saw a big chunk of their retirement plan go up in smoke because the company didn’t have a maximum weighting for GE stock. To make matters worse, because the stock was held in a tax-advantaged account if they sold at a loss (that depends on an individual’s cost basis), the capital loss wasn’t applicable.
Beware the under-diversified defined contribution plan.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.