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Over-investing in company stock in 401(k) plans could cost you

Posted: Friday, November 22, 2002

NEW YORK (AP) -- Don't you get it? Over-investing your retirement savings in your company's stock may cost you big, maybe for the rest of your life.

It's a message that many people are choosing to ignore. Sure, you've heard about Enron, WorldCom and the like, whose employees saw their 401(k) balances nearly vanish when business went bust and the company stock price collapsed.

But you still don't believe it can happen to you. You think you know your company and its business, and you can't imagine that anything could really come along that would totally wipe out your savings in a flash.

Think again.

''It's the ostrich syndrome that hits many workers. They foolishly stick their head in the sand and hope that it's not them,'' said Michael Scarborough, president and chief executive of The Scarborough Group Inc. of Annapolis, Md., which helps individuals manage 401(k) accounts.

Consider this: You have squirreled away $100,000 in your 401(k), half of which is in company stock. One day, your company loses a few big clients, and the stock tumbles 75 percent. Within a few days, your 401(k) is down to about $62,500.

Poof, the money's gone. You might never get it back.

Company stock gets into 401(k) plans in two ways. An employer can offer it as an investment option in retirement plans or an employer can require that its contribution to a worker's retirement savings, known as a match, must come in company stock.

Company stock accounts for about 37 percent of the savings in retirement plans run by employers with more than 5,000 workers, according to figures from the Profit Sharing/401k Council of America, which represents companies.

And a good number of plans far exceed that.

A recent study of 318 large companies by the Institute of Management and Administration found that a dozen companies, including Best Buy, General Electric, Pfizer and Abbott Laboratories, have more than 75 percent of their 401(k) assets in company stock and 40 companies have between 50 percent and 74 percent invested in company stock.

Paint maker Sherwin-Williams tops the list with more than 94 percent of its retirement assets in company stock, energy services company South Jersey Industries has 87 percent, and consumer products giant Procter & Gamble has about 84 percent, the study said.

Contrast that with what the financial experts deem appropriate, which is about 10 percent to 20 percent of retirement savings in company stock. The rest, they say, should be invested in more diversified holdings that can better weather the swings in the market.

Even traditional corporate-run pension plans are only allowed by law to hold 10 percent of the company's stock.

But many workers still want to load up on company stock in their 401(k)s. They say it shows commitment to their company, and they would rather put money into something that they know.

''They simply don't understand the risk of a company stock,'' said Lori Lucas, a defined contribution consultant at Hewitt Associates, a human-resources consulting firm. ''They think that this is their lottery ticket and, if the company does well, they could get very rich.''

It's true that some people may really profit from this approach. But there aren't any guarantees and it's important to weigh the downside.

Investing in a 401(k) is a long-term commitment, so things may look good but they could easily turn ugly later. And the bad stuff could happen a decade from now or more, when you are close to retirement and really need the money.

Just look what's happened to Best Buy stock, which is down 52 percent from the start of this year alone, from about $48 to $23. Given that, there's a good chance that many of the employees who are nearing retirement won't ever come close to recouping their losses.

There was some talk earlier this year of possible federal reform of 401(k) plans, including putting caps on the amount of corporate stock that would be allowed in an employee's retirement account.

That's largely gone nowhere, and not much is expected now with Republicans in control in Washington.

One likely change, though, is easing of a law that allows companies to force their workers to hold company stock acquired through matching contributions until a certain age, often around 55. There have been proposals to shorten that to anywhere from three years to 90 days.

But the truth is that it's hard to regulate change. It's more about educating employees about the risks.

The challenge now is figuring out who will do that. Probably not companies, because they like workers to hold lots of their stock. The financial services companies that run 401(k) plans are not permitted to dispense any investing advice.

And you can't count on publicity to make a difference.

Regardless who spreads the word, the risks need to be broadcast loud and clear.

You may hit it big by bulking up your retirement savings with company stock. But you might also go broke.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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