How Much of Your 401(k) Should Be in Your Employer's Stock?
Original post by Craig Woodman of Demand Media
A 401(k) plan is a sound way to save and invest for your retirement. Your company may offer to match a portion of your contributions, which significantly increases the return on your investment. Your employer may provide shares of its own stock for the match, as well as for a regular investment option. You should consider many factors when deciding how much to invest in your employer's stock.
Limit Your Exposure
When it comes to your 401(k), you should limit your exposure to any individual stock, including the stock of the company you work for. Experts often recommend that you invest no more than 10 percent of a retirement investment portfolio in any one individual stock, so keep this in mind as you plan your investments. If your employer provides its matched investment entirely in company stock, invest all of your 401(k) investment in other plan choices.
In 1999, the average 401(k) account holder invested 19 percent of their retirement fund in their own company's stock. In the early 2000s, employees became more conservative. According to the Employee Benefits Research Institute, the percentage of the retirement portfolio that is invested in the employer's stock has dropped to 11 percent today. The increased conservative attitude is thought to be related to the collapse of many large companies, and the fact that many employees of these company lost much of their retirement funds.
Investment in your employer's stock can represent a double risk. If the value of the stock goes down, it could indicate financial problems with the company. Management could institute aggressive budget cuts, putting your job at risk. By diversifying your portfolio into other investments, you can reduce this risk. If the company closes, you may still retain a sizable portion of your 401(k) balance.
Your employer's stock may be the best investment option in your 401(k) plan, and be a solid performer. Consider the value of your 401(k) plan compared to your other retirement assets. You may have 100 percent of your 401(k) in company stock, but that individual account may only represent 10 percent of your total retirement investments. In this case, your investments would be sufficiently diversified. Other mutual funds may invest in your company stock which could increase your exposure without you knowing it.
- Market Watch; A Dangerous Combination--Company Stock and Your 401(k); Ray Martin; May 2001
- MSN Money; 7 Ways to Mess Up Your 401(k); Liz Pulliam Weston; December 2007
About the Author
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.