The bad rap given to employer stock in 401(k) plans following the Enron Corp. debacle is undeserved for many plans, a Pensions & Investments study concludes.
Although stocks have suffered over the past 18 months, company stock in many plans outperformed equity index funds over the five- and 10-year periods ended Sept. 30, according to P&I's study. For this article, P&I looked at the stock performance of 40 of the nation's largest corporate defined contribution plans that also have the highest percentage of company stock.
In fact, the stock of 31 of the 40 companies outperformed the Standard & Poor's 500 index over 10 years, and 26 outperformed the index over five years.
Unlike employees at Enron, who saw their 401(k) plan balances almost wiped out because of their heavy investments in Enron stock, longer-term employees of most of the companies examined generally remain ahead of where they would have been with more diversified portfolios. That is the case even though their retirement accounts might have taken a beating in the past 18 months.
Annualized gain
The P&I analysis showed that the average annualized gain of the stock of the 40 corporate defined contribution plan sponsors was 12.6% from Sept. 30, 1991, to Sept. 30, 2001. For the same period the S&P 500 index had an annualized gain of 10.4%.
Over the five years from Sept. 30, 1996, to Sept. 30, 2001, the average annualized gain was 4.9%, compared with 4.2% for the S&P 500.
So, even if a corporation matched participant 401(k) plan contributions with nothing but company stock, and required participants to hold that stock until age 55, employees still would have made out better than many other more diversified investors over the last decade.
That's not to suggest employees would be wise to place most of their assets in a single stock.
"If the company chooses to give you a match and it's all in your company's stock, that's certainly better than the alternative of not taking the match," said Brian Hollander, president and chief executive officer of DirectAdvice Inc., a Hartford, Conn.-based financial planning company. "If you have a choice between taking any individual stock and one or more mutual funds," choose the mutual funds, he said.
That said, Mr. Hollander acknowledged that companies offer employer stock as a match because they believe it's a good investment.
Said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago: "Companies do not casually have company stock in their plans," Mr. Wray said. "Companies are rational decision-makers. They don't have company stock in the plan unless they rationally feel it will be a successful program."
Even after 18 months of market declines, and immediately after the Sept. 11 attacks, the stock of some companies, including Citigroup Inc., Pfizer Inc. and General Electric Co., had 10-year annualized returns exceeding 20%.
Citigroup success
One of the most successful companies over the past 10 years is New York-based Citigroup. The company's stock price zoomed from $2.85 per share on Sept. 30, 1991, to $40.22 per share on Sept. 30, 2001. That's an annualized gain of 30.3%, or nearly three times the annualized gain of the S&P 500 over the same time period. In the five years ended Sept. 30, 2001, Citigroup's share price nearly quadrupled from $11.83 per share, a five-year annualized gain of 13% and more than three times the S&P 500's 4.2% annualized gain over the same period.
Citigroup's defined contribution assets rose with the company's stock price. As of Sept. 30, 1996, then-Citibank reported defined contribution assets of $2.1 billion, with 35% of those assets invested in Citibank stock. As the stock price rose, so did the defined contribution assets, even though the amount invested in company stock remained about the same. By Sept. 30, 1998, Citigroup (the name changed in 1998) reported $6.3 billion in defined contribution plan assets, with 35% invested in company stock, according to P&I's annual plan sponsor survey.
A year later, defined contribution plan assets had grown to $9 billion, and the percentage of those assets held in company stock had risen to 43%, according to the P&I survey.
In 2000, Citibank merged its defined contribution plan with that of the Travelers Group. Defined contribution assets listed as of Sept. 30, 2000, totaled $11.6 billion, and nearly 53% of that was in company stock, according to P&I's survey.
As of Sept. 30, 2001, the assets of the defined contribution plan fell 16.5% to $9.8 billion. The percentage of those assets in company stock fell also, to 46%, according to the P&I survey.
The story is similar at Pfizer Inc., New York. That company's stock price rose nearly 800% between Sept. 30, 1991, and Sept. 30, 2001, an annualized gain of more than 24%. The company's five-year annualized gain is a healthy 12.3%.
Pfizer's defined contribution plan assets increased 230% over the same five-year time span, an annualized gain of nearly 27%, according to the P&I survey. Over that same time span, Pfizer's allocation to company stock was steady at just more than 80%, about two times the average, Mr. Wray said.
General Electric Co., Fairfield, Conn., increased its stock price to $37.04 per share from $5.63 per share between Sept. 30, 1991, and Sept. 30, 2001, an annualized gain of almost 21%. During that same time, the company increased its allocation to company stock from 44% in 1991 to 68% in 2001, according to the P&I survey. The company's defined contribution assets more than doubled in value, from $9.8 billion in 1991 to $27 billion in 2001, according to the P&I survey.
Faring well
Other companies with above-average defined contribution asset allocations to company stock also fared well in the 1990s.
Abbott Laboratories, Abbott Park, Ill., saw its stock price jump 371% in the 10-year period, an annualized gain of nearly 17%. During that time, the company kept between 86% and 90% of its defined contribution assets in company stock. The value of its assets increased $1.9 billion in 1991 to $5.7 billion in 2001, according to P&I surveys.
The stock price of Procter & Gamble Co., Cincinnati, increased at a 13.3% annualized rate between Sept. 30, 1991, and Sept. 30, 2001. At the same time, the company increased its defined contribution company stock asset allocation to 93% in 2001 from 13% in 1991, according to P&I data. Defined contribution assets grew from $7.8 billion to $10.5 billion.
Again, such success isn't surprising to Mr. Wray. He said companies with high defined contribution allocations to company stock help their own stock prices rise.
According to Profit Sharing/401(k) Council studies, of the companies that offer 401(k) plans to employees, 52% offer a company stock investment option, meaning employees can choose it or not, Mr. Wray said. Forty-eight percent of companies that offer 401(k) plans make contributions to employees' accounts in the form of corporate stock. Of those companies that contribute company stock, 80% restrict employee diversification out of the company stock until between the ages of 50 and 55, Mr. Wray said.
