Company stock is playing a decreasing role in defined contribution plans, both in the percentage of sponsors offering stock and the percentage of participants investing in it, according to a new report by Vanguard Group.
The Vanguard analysis of 1,351 plans showed that 9% of plans offered company stock in June 2011 vs. 11% in December 2005; the percentage of plan participants using company stock dropped to 17% from 26%, during the same period.
This is the first time Vanguard has conducted an analysis of company stock among its clients, said Vanguard spokeswoman Linda Wolohan in an e-mail. The report analyzed records of plans for which Vanguard has been record keeper continuously during the study period.
Vanguard chose 2005 as the starting point of its research because it was the year before the Pension Protection Act was enacted.
“Under the PPA, most sponsors offering employer stock must allow participants to diversify employer contributions directed to employer stock and must notify participants annually of this right and the related risks of a concentrated stock position,” the report said. “Meanwhile, ongoing litigation on employer stock has underscored the risks that concentrated stock positions may pose for plan fiduciaries.”
The Vanguard report concluded that the declining role of company stock in DC plans “seems largely a function” of changes in plan design, such as placing restrictions on the amount of company stock held by participants, dropping company stock as an option or encouraging greater portfolio diversification among participants.
The report also noted a steady drop over time among participants with high concentrations — more than 20% — of company stock in their retirement portfolios. The percentage was 9% in June 2011 vs. 17% in December 2005.
“About one-third of sponsors with active company stock funds continue to direct an employer contribution to company stock,” the report said. “This design decision has the strongest relationship with participant company stock holdings.”
When an employer's matching contribution to a DC plan is directed to company stock, “the chance of a participant holding a concentrated stock position … more than doubles,” the report said. “When matching and non-matching contributions are directed to company stock, the probability more than triples.”