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Defined Contribution

Company stock remains in plans, but at lower levels

Rob Austin

Company stock remains a prominent but somewhat diminishing component of 401(k) plans.

Among plans that offer company stock, the average allocation slipped to 14% this year, according to record keeper Alight Solutions, Lincolnshire, Ill. Alight publishes a biennial survey every other year on defined contribution plan design.

The average allocation was 16% in 2015, said a report on the survey published Oct. 24. In 2007 and in 2009, company stock accounted for 21% of total plan assets among 401(k) plans offering this option. In 2011, it was 19%, and in 2013, it was 15%.

"I think there is a general awareness of better diversification," said Robert Austin, the Charlotte, N.C.-based research director for Alight, describing in an interview why company stock allocations have declined. "Sometimes this can be participant initiated, while other times it can come from a recommendation in managed accounts or online advice."

To improve participants' portfolio diversification, "there is a trend (by sponsors) to put some limits on the contribution and/or (account) balance" of company stock, Mr. Austin said.

Also striving for diversification, sponsors are reducing their use of company stock as a corporate match. "Now, only 11% of plans with company stock have the match in company stock," he said. "Back in 2001, it was 45%."

Vanguard Group Inc., Malvern, Pa., has found 401(k) plans making matches in company stock had an average of 23% of assets in company stock last year. When they made the match in cash, the company stock concentration average was 18%.

In an annual report on its record-keeping clients published in June, Vanguard said participants have been reducing "concentrated positions" of company stock in their accounts. Last year, 24% of participants held large amounts of company stock. In 2007, it was 32%. Vanguard defines a "concentrated position" as 20% or more of company stock in a participant's account.

Many participants still have big company-stock allocations because "most participants view company stock as a safer investment than a diversified equity fund," the Vanguard report said. The "implied endorsement" of a match in company stock "often leads participants to invest more of their own savings in the stock as well," the report said.

Vanguard and other surveyors of DC plans also have found reduced interest by sponsors in offering company stock in their 401(k) plans. Between 2007 and 2016, the percentage of Vanguard DC clients offering company stock dropped to 9% from 11%.

The latest Alight Solutions survey reported that 57% of companies with publicly traded stock offered company stock in their 401(k) plans this year vs. 63% in 2015. In 2013, it was 65%, and in 2011, it was 63%.

In its annual surveys, Callan Associates, San Francisco, has tracked declining interest among sponsors. Last year, 38.5% of DC plans offered company stock — a percentage that had dropped almost steadily from the 48.3% that offered it in 2009, said a January report on the most recent Callan survey.

When asked how they limit their company-stock liability, sponsors' most common answers were: communicating diversification principles (73.3%), regularly reviewing company stock in investment committee meetings (50%) and offering tools to improve diversification out of company stock (46.7%), the Callan report said.

When asked what changes they would make this year, two-thirds told Callan they wouldn't do anything and 22.3% said they would increase communication. The more emphatic actions — capping the amounts of stock in participants' accounts or freezing contributions of company stock — received few responses. Eliminating company stock received none.