Is Company Stock Hazardous to Retirement?
Kleyman, Paul, Aging Today
WARNING: Company stock may be hazardous to your retirement.
Corporate stock certificates will never carry cigarette-type warnings like the one above, but retirement experts have become so alarmed in the wake of scandais-such as those at WorldCom and Enron-that most agree that measures must now be taken to protect employees from excessive investment in the their companies.
"A consensus has emerged that, at a minimum, employees should be able to diversify more easily. That is, they should be able to sell the company stock they receive in the form of employer matches [to their 401(k) contributions] as soon as they are vested," stated Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Munnell, who was a member of former President Clinton's Council of Economic Advisors, added that economists concur widely "that employees-should be well informed that they are taking excessive risk in concentrating their 401(k) assets in company stock."
20 MILLION AT RISK
Munnell spoke at the recent Fourth Annual Joint Conference for the Retirement Research Consortium in Washington, D.C. Noting that about 20 million employees in the United States hold more than 10% of their 401(k) assets in company stock, she emphasized that it would not be a public-policy issue if those overinvesting in their companies were wealthy and held substantial other assets. "This is not a rich man's game," she stated. Munnell pointed to a study presented at the conference showing that "higher-paid executives are less likely to invest their money in company stock than lower-paid employees."
The study she referred to, "Inefficient Choices in 401 (k) Plans: Evidence From Individual Level Data," examined 401 (k) fund activity by 28,809 pension participants at a large consumer-products manufacturer. Researcher Julie Agnew, an economist at the College of William and Mary School of Business Administration, found that three-quarters of the employees hold more than 10% of the 401(k) assets in company stock. Overall, the workers were allocating 49% of their retirement assets to their firm's stock, slightly above the 43% U.S. average for large companies. Furthermore, 27% directed 100% of their investment into company equities.
These allocations are "too much by almost any standard," Munnell stated. Observing that Agnew's findings are in line with other corporate-pension analyses, Munnell explained that in 1974, through the Employee Retirement Income Security Act (ERISA), Congress restricted investment in company stock to no more than io% of allocations-but only in traditional defined-benefit pension plans. "ERISA requires that fiduciaries diversify plan investments," she said. Congress did not extend the 10% cap to definedcontribution plans because, Munnell said, "companies sponsoring profit-sharing plans that were heavily invested in company stock successfully lobbied against it." The newer defined-contribution retirement plans do not guarantee future pension benefits-they guarantee only that the company will pay in a limited amount while the employee is with the firm.
When ERISA was passed, Munnell said, defined-contribution plans were mostly profit-sharing arrangements offered to employees as a supplementary benefit. Profit sharing enabled workers to share the corporation's wealth by acquiring its stock while retaining the security of a customary defined-benefit pension. "The problem now is that the landscape has changed," she said. As 401(k) plans became the primary type of defined-contribution programs, they have replaced traditional pensions in most quarters. In fact, many companies have actively prompted employees to invest in company stocks. Munnell noted that at some major corporations, such as Proctor & Gamble and Sherwin-Williams, "company stock accounts for more than 90% of 401(k) assets."
ENRON'S END RUN
Some observers suggest there is little need to worry about workers' pension security if a company also offers a traditional plan, Munnell said. …