Nov 11 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
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
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
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
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
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
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
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
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.
The author is a Reuters contributor. The opinions expressed
are his own.