Stop Betting Your Retirement on Your Employer’s Stock

There are many large businesses that subtly encourage their employees to own company stock inside their retirement accounts. This is a big mistake in my opinion. In practical effect you are doubling down on the future success of your employer. First, your income depends on a continuation of your job. Second, your retirement depends – at least in part – on the strategic decisions of upper management. Bad decisions by management can cost you your job and cause your stock to tank. Folks working at Wall Street’s “too big to fail” banks have learned this lesson the hard way

According to a recent report, employees at the five largest Wall Street banks experienced a decline of more than $2 billion in the value of employer stock held inside their 401(k) accounts in 2011. In some cases, this hit was way out of proportion because employees held too much of their employer’s stock.

From the article:

[Morgan Stanley employees] held 24 percent of retirement assets in the bank’s stock at the beginning of last year, the highest percentage of any of the banks. They saw the value of Morgan Stanley shares in their portfolios decline $570 million in 2011 as those shares plunged 44 percent. Bank of America employees, who put 13 percent of their assets in the bank’s stock, lost $1.37 billion last year, as the shares dropped 58 percent.

How does this happen? In the case of Morgan Stanley, employee 401(k) contributions were matched with company stock. Then those employees (or at least the careless employees) let that stock accumulate.

What would I do if my employer matched with stock? I would promptly sell it and buy an index fund. Changes in federal law in 2006 prevent an employer from requiring employees to hold employer stock in their retirement accounts.

Some employees may think “my employer is an awesome company with an awesome product line so I want to go with the flow.”

I’m sure that’s what employees at Research in Motion (the now-tanking Blackberry company) thought before the arrival of the iPhone and Android products.

My guess is that a large percentage of employees own employer stock in their retirement plan due to complacency and inattentiveness. They don’t appreciate the risk until that stock experiences a huge drop in value – like the big banks.

More than ever, a successful financial retirement is about risk management. Depending on your employer for your earned income and your retirement income is poor risk management.

Here is a link to the article about the Wall Street 401k losses.

FREE UPDATES: If you enjoy what you read here, please consider subscribing to receive free updates automatically by RSS feed or by email. (I promise that your email address will not be shared or used for any other purpose.)