Some plans remain company-stock heavy

Some of the biggest corporate names controlling some of the biggest 401(k) plans have some of the biggest percentages of employer stock in these plans, reaching levels that consultants and even the Pension Protection Act consider too high.

The exposure sticks out at a time when executives at some companies are trying to reduce the role of company stock by, among other strategies, limiting participants' investments in company stock, providing more education to employees about diversification and even eliminating company stock as a plan option.

Consultants say the overall trend is toward company stock holdings decreasing. Still, according to company-provided data in Pensions & Investments' Feb. 8 issue, large companies and their company-stock holdings include:

• Coca-Cola Co., 51.3%;

• Caterpillar Inc., 44.3%;

• General Electric Co., 42%;

• Target Corp., 42%; and

• Occidental Petroleum Corp., 38%.

“From a financial theory standpoint, most experts would not recommend more than 10%” in a single asset, said Pam Hess, director of retirement research at Hewitt Associates LLC, Lincolnshire, Ill. “Individual investors underestimate the risk of a single stock or the stock in their own company.

“No one thinks they'll be the one who will get into a car accident.”

The car crash doesn't have to be Enron Corp. or WorldCom Inc. As P&I reported last month, accounts of participants in the $8.24 billion BP Corp North America Inc. 401(k) plan (called the BP Employee Savings Plan) suffered losses because they had, on average, 29% of their assets in BP's American depository receipts. Since a BP oil well exploded in the Gulf of Mexico on April 20, killing 11 workers and triggering a massive, continuing oil spill, BP's ADRs are down about 48%.

By contrast, employees in the $4.53 billion Goldman Sachs Group Inc. 401(k) plan weathered the recent jolt to the company's stock. Spokeswoman Andrea Raphael said company-stock accounts for 2% of the 401(k) plan assets.

Goldman's stock hasn't recovered since April, when the Securities and Exchange Commission charged the company and a vice president with defrauding investors about a financial product tied to subprime mortgages. The stock is down about 27% since April 15, the last trading day before the SEC announcement.

The company stock holdings of Coke and the other big plans are well above the 20% threshold cited by the Pension Protection Act of 2006 as meriting a sponsor's notification to participants. The law includes a provision for a “model notice” about employer-sponsored securities.

“If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be diversified,” the model notice says. “Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.”

On the whole, companies appear to be getting the message about diversification, as consultants' surveys show a general decline of company-sponsored stock's role in recent years.

In a survey of investing behavior for some 2.9 million participants in 120 large 401(k) plans, Hewitt Associates found company-stock exposure dropped to 10.1% in 2008 from 26.5% in 2004, then increased to 13.8% last year. The gain “was due to market rebound, not participant transfers,” said Hewitt spokeswoman Catherine Brandt. “We still saw participants transferring monies out of company stock” in 2009.

The Callan DC Index shows an almost steady quarterly decline in employer stock holdings to 15% for the quarter ended March 31, from 22.43% for the same period four years ago, said Lori Lucas, executive vice president and defined contribution practice leader for Callan Associates Inc., San Francisco.

“Some might say that any stock in a 401(k) plan is too much because participants are doubling up on their risk — lose your job and lose your investment” if the company falters, Ms. Lucas said. “But participants really like it. Some sponsors want to remove company stock (as a plan choice), but employees resist.”

Ms. Lucas noted that when a company's stock goes up, employees don't want to diversify, and when it goes down, employees think the stock is a bargain. When one company's stock “blows up,” taking participants' retirement assets with it, Ms. Lucas said employees in other companies don't think the same thing could happen to them.

A company match also keeps participants from diversifying out of employer stock. “The company match has a huge impact on employee behavior,” Ms. Hess said. “Employees almost think it's a recommendation when employers match in company stock.”

In a recent survey of 401(k) plans, Towers Watson & Co. found that of 150 companies offering stock as an investment option, 47% make employer contributions in stock.

However, for companies offering stock as an investment option, 28% said they are giving participants a ceiling on how much they can invest in company stock, while 12% are considering such action for next year. Three percent have eliminated company stock as an investment option, and 5% are contemplating such action next year, the survey said.

A big allocation of company stock reduces a company's 401(k) rating by BrightScope Inc., said Ryan Alfred, president and co-founder of the San Diego-based firm that provides plan ratings. “Most industry experts I talk to use 10%” as the cutoff point for a single asset in a portfolio, he said.

Although company stock isn't the biggest factor in a BrightScope rating — high salary deferral rates and corporate matches are more important — the firm's rating formula penalizes any 401(k) plan with more than 10% in employer stock, he said.

Mr. Alfred said he detects a “slow trend” of declining allocations of company stock in 401(k) plans whether because of the publicity of lawsuits over investment losses due to declines in company stock or companies' education efforts. “Employees are more sensitized, but it's hard to get people to diversify,” he said.

Company stock accounts for 28% of the $7.36 billion 401(k) plan at Johnson & Johnson, New Brunswick, N.J., according to P&I's Feb. 8 issue. Five years ago, employer stock accounted for 39.8%.

“We don't direct individuals to purchase company stock, offer inducements (to employees to buy stock) or use it to match employee contributions,” William Price, senior director of corporate communication wrote in an e-mail response to questions. “We do not have a policy for placing limits on a participant's stock allocation.” Company stock is one of nine investment choices in the 401(k) plan.

At CSX Corp., Jacksonville, Fla., company stock accounts for 38.8% of the $1.43 billion 401(k) plan, according to P&I. CSX doesn't cap exposure to any asset class, spokeswoman Lauren Rueger said in an e-mail response to questions. There's no corporate match using company stock, she added.

Company stock now accounts for about 34% of assets in the $1.14 billion 401(k) plan at Praxair Inc., Danbury, Conn., according to P&I's Feb. 8 issue. That exposure “is primarily due to the outperformance of Praxair stock vs. other investments,” CFO James Sawyer wrote in an e-mail response to questions. “Praxair's stock value has increased nearly tenfold since its IPO in 1992.”

The company's 401(k) match is in cash, and Praxair “has significant employee training sessions to encourage workers savings and the importance of diversification,” he added.

At McDonald's Corp., Oak Brook, Ill., “looking at company stock as a percentage of assets can be misleading, especially when the market as a whole has not performed as well as McDonald's stock,” said Ken Naatz, director of global benefits, in an e-mail response to questions.

“In the three years ending June 30, 2010, the average annual return of the McDonald's stock fund is 12.8%,” he added. “In contrast, all of our stock-based investment funds have negative returns over that time period.” As of May 31, company stock accounted for 45.4% of assets in the $2.45 billion McDonald's 401(k) plan, he wrote.

“For a number of years, our communications to employees have emphasized the need for diversification,” he wrote.

In addition to the employer match being made in company stock, McDonald's stock also is one of 12 investment options.

The willingness to diversify was highlighted in a Callan survey of 90 DC plans — most of which are 401(k) plans. The survey reported that 14.3% of respondents in 2009 said they would “offer more tools to improve diversification out of company stock.” Two years earlier, the number was 10.7%.

“Sponsors are very much more aware of the risks of employer-sponsored stock than they were 10 years ago,” said Callan Associates' Ms. Lucas.