Updated with correction.
The rampant ricocheting of the stock market recently has given defined contribution researchers, consultants and executives another opportunity to preach the value of diversification and issue warnings about an overreliance of employer stock in participants' 401(k) accounts.
The experts' concerns are highlighted by discomfiting activity in financial markets. For example, the CBOE volatility index in August recorded the biggest one-month increase in its history; the third-quarter results for the Wilshire 5000 Total Market index were the worst since the third quarter of 2008; and the third-quarter performance of the Dow Jones Industrial Average was the worst since the third quarter of 2011.
However, DC executives acknowledge a few months of market volatility and sinking stocks won't lead to quick changes by plans or participants in an industry that is slow to transform.
Changes have come steadily over the years as many DC plans reduce — or even eliminate — the impact of company stock. A steady diet of participant education plus plan design changes — such as capping amounts of company stock in participant accounts or freezing the amount of company stock available to DC plans — are among the most practical ways to let participants invest in company stock without going overboard, the experts say.
“Companies have been trying to limit their exposure over the last 10 years,” said Mike Alfred, CEO and co-founder of BrightScope Inc., a San Diego-based company that provides financial data services and rates 401(k) plans based on total plan costs, company contributions, account balances, salary deferrals and participation rates.
In most cases, a 10% allocation to company stock is enough, Mr. Alfred said. An exception, he added, might be startup companies and fast-growing technology companies for which the issuance of company stock — in retirement plans or as stock options — is in keeping with their employees' appetite for risk-taking.