The nation's largest corporate 401(k) plans have the largest appetites for the plan sponsors' company stocks, according to a Pensions & Investments survey of 401(k) plan sponsors.
Among the corporate 401(k) plans that provided data about plan contributions, 50%, made their matches in the form of stock. Among them were Aluminum Co. of America, Minnesota Mining & Manufacturing Co., Rockwell International and GTE Corp.
Several companies among the largest 50 plans -- including Delta Air Lines Inc., GTE, Bell Atlantic Corp., Chrysler Corp. and Eastman Kodak Co. -- also allow participants to invest in company stock as a plan option.
The survey of corporate 401(k) plans, the first for P&I, polled the largest corporate plan sponsors. The data used for this story are based on data for the 50 largest plans.
The P&I findings generally support those of several 401(k) industry surveys that larger plans have relatively heavy concentrations of plan assets in company stock. And most experts don't expect that to change, in spite of sponsor efforts to communicate the benefits of diversification, and the risks and rewards associated with a single stock.
The combination of voluntary employee investments in company stock and the sponsor matching in company stock has resulted in that investment option being one of the most heavily used choices in most of the largest plans, according to the P&I survey.
Voluntary and matching company stock amounts to about 88% of Abbot Laboratories' plan, 45% of the BankAmerica Corp. plan, 33% of the BellSouth Corp. plans and 26% of the GTE plans. At E.I. du Pont de Nemours & Co., the company matching amount is cash, but company stock is the second most heavily used investment option, with $611 million, or about 17%, of DuPont's total 401(k) assets of $3.6 billion.
Michael Wyatt, portfolio manager-savings plans at DuPont, said company stock held in plans can be viewed from two perspectives. He said the corporate view is similar to that of many other companies that want employees to own employer stock for productivity reasons. From the investment perspective, he said, "you need to be careful not to be overconcentrated in a single asset."
"I wouldn't say we are overly concerned, we have looked at it and want our participants to understand the risks in any single asset," he said.
'Tremendous' record
The findings of the P&I survey of large corporate plans are "very typical" with regard to concentrations of company stock, said David Wray, executive director of the Profit Sharing/401(k) Council of America, Chicago.
Noting that individual stocks generally have outperformed the Standard & Poor's 500 stock index during the past few years, Mr. Wray said the larger plans usually are more concentrated in company stock than small or midsized plans.
"The issue is that as you look at these companies over time, it is simple to see that these companies have been the strongest performing companies in the U.S. economy and the workers have been tremendously rewarded," Mr. Wray said.
Mr. Wray said company stock should be viewed in the same manner as other selections in 401(k) plans. "The law says these funds must be invested in a way that is in the best interests of participants and companies wouldn't put company stock in unless it has a reasonable opportunity for success."
In addition, company stock has had a "tremendous track record of success," and in many cases, he pointed out, employees are voluntarily contributing to company stock funds.
"It's not like companies are saying 'you will invest in company stock'; (participants) are putting their own money in there."
Mr. Wray estimated, however, that large concentrations of company stock are found primarily in the larger plans such as those covered by the P&I survey.
"I wouldn't be surprised if (the top 100 plans) have close to 80% of the company stock in the defined contribution system," said Mr. Wray.
Plan sponsors themselves generally voice support for the use of company stock in their plans, both as a match and as a voluntary investment by employees, as a way to increase employee ownership and participation in the growth of their firms.
Opinions mixed
According to RogersCasey, about 32% of employers are "concerned" about concentrations of company stock and 34% are "not concerned." But the number who claim they are not concerned drops to 13% to 18% if company stock represents more than 50% of assets, said Adele Heller, RogersCasey consultant.
"We are concerned, but not that concerned in that we want to want to educate participants about not having all their assets in a single stock. We provide information about the higher risk in a single security," said Duane Whitney, director-retirement plans at American Stores Co., Salt Lake City.
Mr. Whitney noted part of the attraction of his company's stock has been its performance -- averaging 23% a year for the three years ended Dec. 31.
The company stock investment fund at Bell Atlantic Corp., New York, with $5.6 billion, represents about 43% of the total assets of the $12.9 billion in four plans. The company match at Bell Atlantic is made in company stock. Employees can begin diversifying out of the company stock match partially each year after they reach age 55 or have been participants in the plan for 10 years.
Don Santerre, investment manager at Bell Atlantic Asset Management, said he is not concerned about the high level of company stock in the plan. In addition to the company match, "if participants decide to make further investments in company stock, it is sort of a mixed blessing showing interest in the company; you want employees to feel they have a stake, it also has some risk, but it is their decision."
Mr. Santerre said participants are provided with information and "warnings" about company stock and that "after we give them the information about company stock, our role stops."
Mr. Santerre, too, noted Bell Atlantic stock has performed well, returning an average of 28% for the three years ended Dec. 31.
"There is no right or wrong answer" whether the 26% allocation to company stock in the $9.7 billion AT&T Corp. 401(k) plan assets is excessive, said Jim Heller, vice president-savings plans and other post-employee benefits at AT&T Investment Management Co.
But, he said, "we look at the trends, and the allocation to company stock today is about 10 to 15 percentage points lower than five years ago," said Mr. Heller. He said the addition of new investment options and enhancements to the plan have resulted in a more diversified approach by participants.
"If it (company stock) is offered in the context of healthy choice, we see no reason there shouldn't be any company stock as a selection," said Mr. Heller.
AT&T stock also has done well; during the last six months of 1997 alone the stock returned 57%.
But even though the P&I survey generally supports other industry research regarding high levels of company stock in large 401(k) plans, experts continue to note the outsized risks associated with major positions in a single stock.
"Basically what participants are facing with heavy ownership of their company's stock is twice the risk for the same return as in a stock fund of similar stocks," said Shlomo Benartzi, accounting professor at the University of California-Los Angeles and a behavioral finance expert.
Mr. Benartzi said most employee participants believe company stock is "safer than most other investments."
He emphasized the warnings that have been voiced repeatedly for the past three years that participants should diversify their retirement savings and not end up with heavy concentrations of company stock.
"The only concrete suggestion I have for companies that want to see employees out of company stock is to put (matching) company stock into the plan and tell employees they can't take it out, or to remove it as an option and tell participants 'if you want company stock you can put your money in the stock'," he said. "Because, once you put it in, you are giving you blessing and saying it is a reasonable investment option."
