It's time to cut employee allocations to company stock in defined contribution plans. A Pensions & Investments survey in the Aug. 23 issue showed employees in 17 of the 50 largest defined contribution plans had allocations of 40% or more to the sponsor's stock. In four plans, company stock allocations were more than 80%.
Allocations of more than 40% to employer stock, especially where the company does not offer a defined benefit plan to all employees, are dangerous to employees' retirement well-being. Employers must take the lead in getting those allocations down to more appropriate levels. They must allow, even encourage, employees to diversify their portfolios.
We know all of the arguments in favor of high employee ownership of company stock: the employees like it; it helps keep them motivated because they benefit directly when the company prospers; it puts a large block of stock into friendly hands, making a hostile takeover unlikely.
But there are answers to all of these arguments. Just because employees like to have a high commitment to company stock doesn't mean it's good for them in the long run. Some employees like to smoke, too, but many companies help employees to quit, or at least make it more difficult for them to smoke.
The motivation argument overlooks what's best for the employees in the long run in favor of what's best for the employer. It says: We'll take the chance the employees will suffer in the long run, as long as they are motivated in the short run.
Likewise, the "friendly hands" argument focuses on the needs of the company, not the employees. It protects the employer, while leaving the employees exposed to specific risk.
No prudent investor would put 40% or more of assets into one security, and for most employees the defined contribution balance is a huge part of net worth. In this case, employees have both their jobs and substantial parts of their retirement income tied to the fortunes of the company.
There are specific actions employers should take:
* They should offer employees investment choice in any defined contribution plan, but especially where employees have only defined contribution retirement plans;
* Any materials sent to the employees about the plan should encourage them to diversify; and
* If a company makes its contribution to the plan in the form of company stock, employees must be able to, and encouraged to, diversify out of that stock immediately, or at least after a relatively short period.