Participants in corporate defined contribution plans have, on average, 36% of their assets invested in the stocks of their employers. But many such allocations to employer stock are far higher. And these allocations range all over the lot, even for companies in the same industry.
For example, at Abbott Laboratories, the average employee allocation to company stock is an extraordinary 86.5%. At Pfizer Inc. it's an even higher 88.1%, while at Eli Lilly & Co. it's 47%. At American Airlines it's 73%, at Delta Airlines 15%, and at US Airways, 8.2%.
At Bell Atlantic (now Verizon), company stock is 59% of the average employee account. At BellSouth it's 62%; at Sprint Corp. it's also 62%; and at AT&T, only 28%.
But if a portfolio of a defined benefit plan had even 28% of its assets invested in a single stock, it would be considered imprudent because the portfolio would be considered undiversified. The Department of Labor probably would be taking a close look at the actions of the fiduciaries.
But because the portfolios with such heavy concentrations of company stock are the self-directed portfolios of defined contribution plan participants, the Labor Department accepts them. The assumption is the employees are making the choice to invest so heavily in company stock and are cognizant of the risk.
In some cases that is no doubt true. Employees often like to invest part of their assets in the stock of the company for which they work out of loyalty or optimism.
In many cases, however, the high company stock allocations are not the free choice of the employees. Too often these high allocations occur because companies contribute their stock, rather than cash, to the plans.
And many have some restrictions on when and how the employees can sell the stocks to diversify their portfolios.
Surely, if the company is putting the stock into the employees' accounts and the employees aren't free to dispose of it as they wish, then the company is acting in a fiduciary capacity with respect to those stocks, and, it could be argued, with respect to the whole portfolio, because the portfolio is distorted by the company stock.
How many companies have thought that through?
Companies often want to build up a store of stock in presumably friendly employee hands as a possible defense in the event of an unfriendly takeover attempt. This motive is presumably one of the objectives behind the restrictions on employee sales of the contributed company stock.
Employees should have the unencumbered right to turn the contributed securities into cash immediately, if they so desire, and then to reinvest that cash in other securities.
Further, all companies in their investment educational efforts should try to discourage employees from maintaining positions in company stock of more than, say, 30%.
At some point the extreme allocations to company stock are going to come back to bite the employers who allow them, and especially those that virtually mandate them by restricting employee freedom to sell.
At the very least, the employers might face suits from unhappy employees if the stocks ever underperform for a significant period. They also likely will face investigation by the Labor Department or the Internal Revenue Service over the appropriateness of any restrictions on the employee sale of the stock.
I wouldn't like to have to defend those companies in court.