Image Credit: Christophe Vorlet
By Jason Zweig | July 14, 2017 1:37 pm ET
The perennial question about company stock in 401(k) and other retirement plans is timely again. On June 15 and 16, shares in Kroger, the Cincinnati-based supermarket holding company, fell more than 26%, largely on the news that Amazon.com Inc. would expand in the grocery business by acquiring Whole Foods Market. With Kroger’s biggest retirement plans holding just under 28% of their assets in the company’s shares, employees lost about 7% of that collective nest egg in two days. It still hasn’t recovered.
The loss might not be permanent, of course. “Kroger has competed and won against an ever-changing competitive landscape for 134 years,” says spokeswoman Kristal Howard.
Such sharp, shocking losses are a reminder that investing where you work is riskier than it feels.
Buying your company’s stock feels safe partly because of what psychologists call the illusion of control: the unrealistic belief that we can make the future conform to our wishes.
The idea isn’t new. An employee buying stock where he works “is in a position to know about the business and to watch his investment,” economists Robert Foerster and Else Dietel wrote in their book Employee Stock Ownership in the United States, published in 1926.
The Pittsburgh Coal Co., National Biscuit Co. and Firestone Tire and Rubber Co. began offering stock through profit-sharing plans around the beginning of the 20th century. Procter & Gamble Co. launched its plan in the 1880s.
In those days, companies often paid cash “bonuses” on shares that employees held for at least one year. Others sold stakes to employees at an alluring discount from market price.
Today, corporations with traditional pension plans can fund them partly with company stock, avoiding the need to contribute cash, although those shares can’t exceed 10% of pension assets. In retirement accounts organized as employee-stock ownership plans, contributions of company stock are partly tax-deductible to the employer.
The company stock held by employees in 401(k) and other defined-contribution plans is typically contributed from the boss’s capital. That makes it feel like found money.
And everyone has heard stories of workers at Berkshire Hathaway or Google or Microsoft becoming millionaires as their few initial shares burgeoned into a fortune over time.
Still, company stock bristles with a uniquely ruinous kind of risk: It’s most likely to plunge in price when your job itself is in jeopardy. Just think of the employees at Enron Corp. and Lehman Brothers Holdings who suddenly found their retirement plans wiped out and themselves on the street at the same time.
Letting go isn’t easy.
Efren Beltran, a logistics manager at Procter & Gamble, retired last September, a few months before he turned 62. By the time he was 50, recalls Mr. Beltran, P&G shares — through stock options, the 401(k), the profit-sharing plan and stock he had bought in his personal account with after-tax money — were at least half his net worth including his house.
He began selling company stock shortly after he turned 50 and became eligible to do so in the profit-sharing plan.
“P&G is a wonderful company,” he says, “but I could not personally handle the risk of being that concentrated in one stock. I love P&G, but I love to sleep well even more.”
Working with financial planners at Truepoint Wealth Counsel in Cincinnati, Mr. Beltran sold the last of his P&G shares this February. “I’ve had some emotions, divesting from the company I love, but it’s the right thing to do,” he says.
As of June 2016, P&G employees have allocated 87.8% of their net assets in the company’s $11.6 billion profit-sharing plan to its common stock and a class of preferred stock that carries special tax advantages for employees. That’s more than twice the allocation required by the company.
Spokeswoman Jennifer Corso says P&G “can’t offer investment advice” but does “offer additional diversification opportunity” in its retirement plans.
Remarkably, according to the Plan Sponsor Council of America, fewer than one-third of employer-sponsored retirement plans that offer company stock limit how much employees can invest in it.
Many workers probably don’t want them to. In surveys of investors, behavioral economist Shlomo Benartzi found that only 16% to 33% felt their own company’s shares were riskier than the stock market as a whole.
The belief that your job automatically makes you a corporate insider, with special insight on the future and perhaps even the ability to shape that future, is hard to shake.
But more than half of all companies, over the course of their lifetimes as publicly traded stocks, haven’t even outperformed cash.
So putting most or all of your money in only one company, no matter how well you think you understand it, is risky. And putting most or all of your money in the company where you work borders on reckless.
Source: The Wall Street Journal, http://on.wsj.com/2un0xTC
For further reading:
Definitions of BEHAVIORAL FINANCE, DIVERSIFY, ILLUSION OF CONTROL, and OVERCONFIDENCE in The Devil’s Financial Dictionary
Chapter Five, “Confidence,” in Your Money and Your Brain
Chapter Three, “You Are an Egg,” in The Little Book of Safe Money
Research on the illusion of control by Ellen Langer
Shlomo Benartzi, “Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock”
Cass R. Sunstein et al., “The Law and Economics of Company Stock in 401(k) Plans”
Lisa Meulbroek, “Company Stock in Pension Plans: How Costly Is It?”
The Vanguard Group, “Company Stock in Defined Contribution Plans: An Update”
James J. Choi et al., “Employees’ Investment Decisions About Company Stock”
Amazon’s 49,000% Gain: The Most ‘Super’ of ‘Superstocks’ Since 1926