Company stock finds smaller role with participants

Long before the coronavirus tore through the economy and the stock market, defined contribution executives were taking steps to moderate the potential impact of radical swings in their participants' holdings of company stock.

Through plan design changes and continuing education, sponsors have increased diversification and reduced the role of company stock. Their goals: improve outcomes and reduce the risk of owning too much of an undiversified asset, especially during market volatility.

"There has been a steady trend away from company stock," said Robert Austin, the Charlotte, N.C.-based director of research for Alight Solutions.

As proof, he pointed to the Alight Solutions 401(k) index, a monthly measurement of participant actions — trading inflows and outflows plus contributions and allocations — in 13 asset categories since 1997.

At year-end 1997, company stock represented 30.6% of DC plan asset allocations. That percentage has gone almost steadily downhill since, reaching 5.7% in July 2020. The index includes plans with about $200 billion in assets covering more than 2 million participants in Alight record-keeping accounts.

Among record-keeping clients of Vanguard Group Inc., Malvern, Pa., 8% offered company stock last year vs. 11% in 2010.

At Fidelity Investments, Boston, about 2% of client plans offer company stock, down from 4% in June 2010. Company stock represents 4.9% of participants' assets in 401(k) plans, down from 10.4%, spokesman Michael Shamrell said.

As a result, the coronavirus' overall market impact on participants owning company stock in their 401(k) portfolios may not have been dramatic, primarily due to company stock's diminished role but also to relatively little panic selling, consultants and researchers said.

"I don't think the pandemic spurred a rush out of company stock," said Mr. Austin, basing his comments on Alight index's tracking outflows and inflows for accounts due to participants' trading.

For April, May and June, the total outflow of company stock from these accounts was about $160 million, he said. By contrast, net trading outflows of company stock totaled $1.46 billion for all of last year. "So a three-month total of roughly $160 million would not suggest a rush out of company stock," Mr. Austin said.

Robyn Credico, the Las Vegas-based defined contribution consulting leader for Willis Towers Watson PLC, said she doubted participants did much company-stock trading — or any trading — even during the worst of the stock market's decline. For participants, "everyone is a deer in the headlights," she said. "People have stayed where they are."

Ms. Credico said participants face a conundrum with company stock: they may not want to sell if the stock has fallen sharply, and they may not want to sell if the stock is rising.

Sponsors reviewing company stock and other plan options are mindful of IRS suggestions on asset diversification.

"If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified," says an IRS guidance document covering sections of the Pension Protection Act of 2006. "Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk," said the document, which addresses investors as well as sponsors.

Consultants have differing views about company stock percentages in retirement accounts. Some prefer lower percentages, but Ms. Credico said her firm believes sponsors are wise to refrain from setting a specific limit. "Providing a cap could be seen by participants as an endorsement of the percentage," she said.

Education remains a first line of defense for sponsors against the risks of holding too much company stock, according to annual surveys by Callan LLC , said Jamie McAllister, the Chicago-based senior vice president and defined contribution consultant.

In its latest survey, published in January, the firm asked sponsors what they did to limit potential liability for company stock. The top answer last year (65.5%) was "communicate to improve diversification out of company stock."

Ms. McAllister said communication has been the top answer in previous Callan surveys. Some sponsors tailor education campaigns to participants with very high concentrations of company stock in their accounts, she added.

Among the 10 choices in the latest survey, the second biggest response was regular reviews of company stock at investment committee meetings (53.1%). The survey covered 114 sponsors, most of which are 401(k) plans.

Sponsors emphasize education rather than capping, freezing or eliminating company stock, Ms. McAllister said. "They fear people might think there's something wrong with the company" if sponsors took strong action.

Still, more sponsors are imposing restrictions. Alight Solutions reported last year that 35% of companies offering company stock in 401(k) plans limited new contributions by participants, limited the percentage of participant balances devoted to company stock, or both. In 2015, Alight said 24% of companies enacted these restrictions.

Alight found that a 20% cap was the most frequently used on employees' holding company stock. Sixty-nine percent of sponsors limiting employee contributions and 58% of sponsors limiting employee balances imposed this cap. Among others, some caps were as low as 10% or as high as 50%, Mr. Austin said.

One company that places a 50% cap on participants holding company stock is Parker-Hannifin Corp., Cleveland, according to the latest 11-K statement for a 401(k) plan that has 29.1% of assets in company stock. A Parker-Hannifin representative didn't respond to a request for comment.

The Alight survey also found a dramatic decrease in employers' use of company stock as a 401(k) match.

In 2001, Alight reported that 45% of survey respondents offered company stock as a match. Last year, only 6% offered it.

A review of the latest 11-K statements by Pensions & Investments noted several companies offering company stock as a match, including Parker-Hannifin, which says this is a default match option unless a participant selects another option.

Community Bank System Inc., DeWitt, N.Y., offers company stock as a match, according to the most recent 11-K statement for a 401(k) plan that has 25.6% of assets in company stock. A company representative did not respond to a request for comment.

The Pension Protection Act has helped reduce the impact of company stock in DC plans by requiring sponsors to allow participants to choose a cash match rather than company stock after three years of service, said David Stinnett, the Malvern, Pa.-based principal and head of the Vanguard Strategic Retirement Consulting Group.

Vanguard considers as best practices for investment diversification placing restrictions on accounts holding company stock and offering a cash match vs. a company-stock match, he said.

Vanguard research also shows how plan design can affect company stock. Among Vanguard clients last year, the average company stock allocation was 27% in plans that offered a company stock option and also used company stock as a match, said a June report. For plans offering a company stock option but making a cash match, the average allocation to company stock was 9%.

The pitfalls of company stock

Some defined contribution plans with more than 20% of assets invested in company stock saw bigger than average losses in 2020. Assets are in millions as of Dec. 31.

Company

U.S. DC assets

% of company stock

YTD return as of March 31

YTD return as of July 31

Costco Wholesale

$20,530

41.2%

-3.0%

10.75%

Exxon Mobil

$19,430

39.1%

-45.6%

-39.70%

Chevron

$18,780

34.9%

-39.9%

-30.35%

Parker-Hannifin

$5,290

29.1%

-37.0%

-13.07%

McDonald's

$3,600

43.3%

-16.3%

-1.69%

Cerner

$2,720

29.1%

-14.2%

-5.37%

Cintas

$2,120

35.7%

-35.6%

12.19%

Enbridge

$1,190

32.7%

-26.9%

-19.54%

J.B. Hunt Transport

$886

27.7%

-21.0%

10.81%

ONEOK

$693

28.9%

-71.2%

-63.12%

Community Bank Sys.

$348

25.6%

-17.1%

-20.74%

S&P 500

--

--

-20.0%

1.25%

Sources: SEC filings, Bloomberg LP