Heavy stock holdings in DC plans declining

As many plan sponsors seek to reduce the role of company stock in participants’ accounts, research shows that these efforts are paying off.

More plans and more participants are moving away from an undiversified asset whose stock-market vulnerability is exacerbated when participants are heavily invested in it, according to Vanguard Group Inc.

Among DC client plans offering company stock, 86% had allocations at 20% or below in 2019 vs. 75% in 2011, said a Vanguard report published in June.

The 20% figure, which Vanguard calls a “concentrated position,” also reflects Internal Revenue Service guidance that any allocation above 20% for a single company or industry means “your savings may not be properly diversified.” The IRS guidance document covers portions of the Pension Protection Act and is aimed at participants and sponsors.

Also last year, 12% of plans had company stock allocations of 21% to 40% of total DC assets compared to 17% of plans in 2011, the Vanguard report said. Two percent of plans had 41% or more of DC assets in company stock vs. 8% in 2011.

The Vanguard report doesn’t identify companies, but Pensions & Investments found some examples of concentrated positions by reviewing 11-K statements for 2019, the latest data available.

For example, some energy companies had high allocations, including ExxonMobil Corp., Irving, Texas (39.1%); Chevron Corp., San Ramon, Calif. (34.9%); Enbridge Inc., Calgary, Alberta (32.7%) and ONEOK Inc., Tulsa, Okla. (28.9%). So did McDonald’s Corp., Chicago (43.3%).

Representatives from these companies either declined to comment or didn’t respond to requests for comment.

All of the companies reviewed by P&I sustained stock price declines by March — some dramatically — from year-end 2019. From this nadir of the coronavirus’ stock market impact, stocks have rebounded, but many hadn’t returned to last year’s levels as of July 31.

For example, ExxonMobil’s stock was down 39.70% by July 31 from its year-end 2019 closing price. Chevron declined 30.35% during this period. At ONEOK, the July 31 stock price was 63.12% below year-end 2019. The results excluded dividends.

Some companies’ shares, however, recovered to the point that they were higher on July 31 vs. year-end 2019, including Cintas Corp., Cincinnati, whose 11-K statement shows company stock accounted for 35.7% of 401(k) plan assets, and Costco Wholesale Corp., Issaquah, Wash., for which company stock represented 41.2% of DC plan assets. By July 31, Cintas’ stock was up 12.19% vs. year-end 2019. Costco’s stock was up 10.75% from Dec. 31. The results excluded dividends.

The 11-K data doesn’t reflect the degree of trading of company stock within DC plans. However, the Vanguard research report also showed that many individual investors are avoiding high concentrations of company stock and company stock in general.

Among client plans offering company stock, Vanguard found that 67% of participants held zero last year — a steady climb from 43% in 2010.

Last year 18% of participants had 1% to 20% of company stock in their accounts, down from 26% in 2010. Also last year, 7% of participants held 21% to 40% of company stock, down from the most recent peak of 14% in 2013.

Vanguard also found that some participants kept giant amounts of company stock — ranging from 41% to more than 80%, in their accounts. However, this group shrunk to 8% last year from 19% in 2010.