Finally \u2013 July 2012 has arrived!\u00a0 Employees all over America will get the sobering news that there really are fees being siphoned out of their 401(k) accounts and the amounts, will hopefully generate \u201cshock and awe.\u201d\u00a0 Fees will now begin to compress and over time, employers will begin offering low cost index funds to employees, and there will be a mass migration out of expensive actively managed funds and into lower cost funds or target date funds.\u00a0 Hopefully, this higher level of disclosure and transparency will save American workers literally billions in future fees.<\/p>\n
Another equally important 401(k) topic is whether you should own company stock in your 401(k).\u00a0 Today, nearly 50% of all 401(k) plans offer participants company stock and of those participants, 28% held more than 20% and 5% held more than 80% of their 401(k) money in company stock.\u00a0 Nearly 66% of large companies offer company stock to employees.<\/p>\n
If you own company stock in your 401(k), take some sage advice \u2013 sell it.\u00a0 Not some of it but sell every single share.<\/p>\n
Look no further than Enron\u2019s bankruptcy in December 2001. \u00a0At the end of 2000, 62% of Enron employees\u2019 401(k) assets were invested in Enron at nearly $80 per share.\u00a0 In the next year, these employees who felt they knew their company, watched their holdings drop to less than $.070 per share \u2013 and then you lost your job.\u00a0 If you were a Lehman employee, you probably owned a fund called the Lehman Brothers Stock Fund which had over 10% of it\u2019s assets in what became worthless Lehman stock.<\/p>\n
In 2009, International Paper had cash problems because of the recession and began matching employee 401(k) contributions with company stock instead of cash.\u00a0 In the last 12 months hundreds of the world\u2019s largest companies are down large amounts, like Alcoa down -48%, Citigroup down -36%, Caterpillar down -27%, Ford down -31%.<\/p>\n
Your retirement fund is the nest egg that you will rely upon one day to pay your bills when you are too old to work.\u00a0 When you own funds that are properly diversified, no one company can have a marked impact upon your portfolio. That\u2019s why owning literally thousands of stocks and bonds is critical. The closer you get to retirement, and the larger your 401(k) becomes, the risks of not being adequately diversified are great.<\/p>\n
Those who argue with this position say:\u00a0 \u201cBut I have insights into my company and I have an edge.\u00a0 I know what is going on.\u201d Many enjoy feeling \u201cpart of things\u201d at work. Many feel \u201csafer\u201d owning company stock because they believe they understand the company and have insights.\u00a0 Owning company stock may be a quiet demonstration of loyalty – as if bosses are calculating how much of one\u2019s 401(k) is invested in company stock.<\/p>\n
These are interesting arguments, but they are simply irrational from an investment standpoint.\u00a0 Your 401(k) is for only one purpose:\u00a0 to fund retirement.\u00a0 And therefore, risk management is a critical issue. \u00a0Having any individual stocks instead of owning thousands is just not prudent.\u00a0 \u00a0And if you believe that just because you work at a company that you have some kind of an edge, don\u2019t kid yourself.\u00a0 Even management is often unaware of important issues driving their own companies \u2013 ala JP Morgan and the London Whale.<\/p>\n
Lisa Meulbroek who chairs Financial Economics at Claremont-McKenna College wrote in a study on this topic: “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.”\u00a0 When you own your company\u2019s stock, you aren\u2019t getting compensated for the increased risk you assume.<\/p>\n","protected":false},"excerpt":{"rendered":"
Finally \u2013 July 2012 has arrived!\u00a0 Employees all over America will get the sobering news that there really are fees being siphoned out of their 401(k) accounts and the amounts, … Read more