Your employer's stock: How much is too much?

Fri Nov 11, 2011 8:37am EST

Nov 11 (Reuters) - The 2001 collapse of Enron may look like small potatoes by post-2008 standards of corporate malfeasance and disaster. But it was pretty ugly at the time -- and nothing was more painful to watch than the hit employees took when they lost their jobs and their retirement savings all in one blow.

At the end of 2000, 62 percent of assets in Enron's 401(k) were held in the company's own stock; when Enron went into a free fall the following year, it froze the plan assets and soon-to-be-jobless workers watched helplessly as their savings evaporated.

The Enron debacle helped advance a pension reform debate in Washington that ultimately produced the Pension Protection Act of 2006 (PPA). That law included several important reforms aimed at reducing worker exposure to the employer stock, but it stopped short of actual restrictions on the amount they could hold.

Five years later, plenty of big corporations still have heavy concentrations of their own stock in retirement plans. Brightscope, a financial research firm, provided Reuters with a list of companies with the highest concentrations of their own shares in 401(k) plans (see chart at).

In some cases, the heavy concentrations are the legacy of earlier employee stock ownership plans, or companies that use their own shares to provide matching contributions. That's the case at Colgate-Palmolive Co. , which topped the list with 75.4 percent of plan assets in its own stock at the end of 2009 (the most recent data available). The company has offered matching contributions in its own shares since 1989, a company spokeswoman says.

Scana Corp ., an energy company that ranked No. 4 on the Brightscope list, had 100 percent of its plan in company stock until it began diversification efforts in 2000. Another factor: its stock has been a strong performer.

Towers Watson research shows that 78 percent of Fortune 100 employers who allow employees to hold their own shares don't limit their holdings.

Yet volatile financial and employment markets point strongly to the need for retirement investors to protect themselves -- no matter how attractive an employer's stock may look. "I wouldn't tell people not to invest in their own stock, but they should keep the percentage reasonable," says Roger Wohlner, a financial adviser to both retirement plans and individuals. "If your income and future retirement both are tied to your employer, it can be a real double-edged sword if the company gets in trouble. You lose your job and your retirement savings."

Measurable progress is being made toward a safer level of diversification. Brightscope reports that 15 percent of all 401(k) plans contained some level of employer stock in 2009 -- down 2 percent from 2007 levels. More encouraging, net assets in plans held in company stock fell 25 percent during that same time period.

Although the PPA stopped short of limiting employer stock holdings, it does require plan sponsors to enable employees to diversify out of any company stock they have purchased, and to unload shares contributed by the employer after three years on the job. The law also requires employers to provide quarterly communication and education about the importance of diversification.

Towers Watson reports that 75 percent of companies that have their own shares in retirement plans are offering seminars and education on the importance of diversification, and 49 percent offer tools that help employees make diversification moves.

Colgate-Palmolive permits all all vested accounts to diversify fully among 18 investment options. "To strengthen the financial well-being of our employees, Colgate also engages Ernst & Young to provide annual education seminars and access to financial advisers for individual meetings to assist employees with their portfolios," the spokeswoman says.

One growing concern among plan sponsors is the growing threat of litigation against companies with heavy concentrations of their own stock in retirement plans. So-called "stock drop" suits were filed against 211 companies from 1997 through 2010, according to Cornerstone Research, which tracks the litigation.

"A sure-fire way to get sued for ERISA violations is to have a big chunk of your plan in company stock, and then have the share price fall 25 percent," says Ryan Alfred, Brightscope's co-founder and president. "All of these companies [on Brightscope's top ten list] will get sued when their stock falls."

The plaintiffs don't always win, of course, but Cornerstone reports that 99 of the cases it tracks have been settled, with the mean settlement amount of $20.8 million.

HOW MUCH COMPANY STOCK IS TOO MUCH?

"If more than 20 percent of your account is in company stock, it's likely to be too high," says Marina Edwards, a senior retirement consultant at Towers Watson. Wohlner is more conservative, advising retirement savers to limit holdings in their employers' shares to five to ten percent.

If you're too heavily concentrated, your employer's plan may offer an advice program that can help you develop a plan for selling down to a more appropriate level.

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The author is a Reuters contributor. The opinions expressed are his own.

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