Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. Print
July 24, 1995 01:00 AM

SPONSOR'S STOCK TABOO IN 401(K)S

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Investment education tools provided by corporate 401(k) plan sponsors are improving measurably, from explaining historic volatility and risk-return relationships to the importance of diversification and tenets of long-term investing. However, one asset class - company stock - is almost never represented in its true light. Sponsor and vendor educational materials rarely discuss the volatility of company stock by comparing the performance of a single stock with that of a diversified portfolio.

    Of nine 401(k) plan guidebooks sent to Pensions & Investments for review during the last year, only one discusses the potential risk of investing a significant portion of account assets in company stock. Even that two-page treatment, buried in the middle of the 244-page book, isn't especially hard-hitting. Publishers of these guidebooks tout them as a great "objective" source of information. Many plan sponsors give them to employees as part of an investment education program. But even these guides, independent of influence from sponsors and service providers, don't impress on plan participants the dangers of overinvestment in a single security.

    A P&I survey found defined contribution plans among the top 1,000 employee benefit plans averaged a 23.3% allocation to company stock last year. Consultants and portfolio managers generally recommend investing no more than 5% of total portfolio assets in a single security. So why isn't this basic tenet of diversification emphasized to defined contribution plan participants? Why do employers continue to make matching contributions in company stock and lock employees into that investment? Many companies, say consultants, are beginning to institute controls on the amount an employee may invest in company stock, but that limit is usually 25% or 50% of an account balance. "If you are going to offer more choices, more education, you have a real problem with company stock," said Jim Klein, principal, Towers Perrin, New York. "If you say something real about company stock, it's not going to be nice."

    The problem boils down to a conflict of interest, say consultants. On the one hand, a company has a cheap way to make its matching contributions to the 401(k) plan and to build a base of friendly shareholders. Companies are worried that warning employees about the dangers of over investment in company stock might send a mixed message."Have faith in your company, but don't invest too much in it," just isn't palatable for many corporate treasurers.

    On the other hand, employers seeking safe harbor from fiduciary liability under the Department of Labor's 404(c) regulations are obliged to disclose the volatility of their 401(k) investment options. Logically, company stock should receive the same level of disclosure as mutual funds options do and employees should be as free to invest, or not invest, in that asset category as in any other in their 401(k) plan.

    To meet the spirit, as well as the letter of the law, corporate defined contribution plans should provide at least as much information about company stock as other options and should eliminate restrictions on trading out of the stock, if employer matches are made in company stock.

    Plenty of stories abound about employees who retire rich because of their company stock investments. But the unheralded story may be the more important one - that of the unlucky employee in a volatile industry who retires with 50% or more of his 401(k) plan in company stock at the moment it reaches its nadir. Rather than let employees rely on luck, employers need to provide full 401(k) plan education that teaches traditional portfolio management techniques to the fullest extent, including honest treatment of the volatility of company stock.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Alternatives: Investing Across the Spectrum
    Sponsored Content: Alternatives: Investing Across the Spectrum

    Reader Poll

    May 9, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Are Factors a Thing of the Past?
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    Out of the Shadows: The Revolution in Shadow Accounting
    The pivotal role of fixed income markets in the ESG revolution
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 9, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference