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Diversification and the 401(k)

I was chatting with a friend about her company’s 401(k) plan a month or so ago. She mentioned that the match was allocated however you already had your money going. So hers was going to her Freedom 2040 fund.

As I opened my mouth to say what a great idea that was and how cool it was that they didn’t give it entirely in company stock, she continued, “I wish it was like X company where they gave it to us in company stock. I loved feeling like a part of the company.”

Since she’d already asked thoughts on 401(k)s, I felt comfortable continuing.

I didn’t put it quite as bluntly as I’d planned, but I said that I’d be happier with the way her current company was doing it, cited Enron’s employees and the collapse, mentioned that she already had her job invested in the company and I knew she was doing a great job of supporting it that way, etc.

Fortunately, she didn’t take offense, said she thought it made sense, and we went on to discuss company loyalty.

But it got me thinking about whether or not noble motives have any place in financial and retirement planning.

On the one hand, I want to say yes. I believe that an important part of finances is giving (though maybe you should give in other ways, like time, if your finances are tight). I also think it’s great to support groups you believe in with your business. And to avoid giving your business to those you disapprove of. In some ways your money is your vote.

At the same time, there’s a place for solid personal financial planning instead of other-focused planning. Maybe if companies were loyal and had their employees’ best interests at heart (and were sure to be stable), there’d be more of a place for investing with them. Maybe. But as it is, there’s no guarantee that the company won’t go under, leaving you without a job and decimating your retirement savings.

If you’re already working for a company you like, you can further support it by excelling at your job and coming up with good ideas for developing the company.

No matter how much I loved a company, I wouldn’t want to make my retirement dependent on their staying in business and doing well in the market. Even if it was APPL.

How do you diversify your retirement portfolio? Do you keep any company stock?

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sjean March 27, 2008 at 2:22 pm

“In some ways your money is your vote.”
I think that is very true, perhaps more important than your REAL votes…

My last company invested it in company stock, but allowed it to be moved immediately. I’d usually let it get up to 5% of my portfolio, then I’d re balance and sell it all in favor of my investments.

My current (new) job awards stock options for certain things, so I imagine I’ll be partially invested in them at some point. But I have not earned any et.

feministfinance March 27, 2008 at 3:18 pm

There’s already a “loyalty” element in many matches when companies make it so that their match does not vest until the employee has been with the company for a certain amount of time. And anyway, a retirement plan is not really the appropriate venue for building company loyalty. That’s better done through being a good place to work.

Although honestly, if Apple made its company match in AAPL stock, I’d get me a part time job there and sign up for their 401(k). Not because I think it’s generally a great idea to load up your retirement accounts with company stock but because I’d only be there for a short time anyway and it’d be an easy way to buy a great (but spendy) stock in a way that felt very nearly free.

Kiran March 27, 2008 at 4:06 pm

I put a significant part of my 401k in my company stock. A quarter of mine, and a quarter of the match.

I feel far far more bullish about my company than the economy as a whole. And I’m willing to put my money where my mouth is.

I’m also of the belief that my company won’t fail. If it does, well I think we would be living in a world where money doesn’t mean much.

Big Wizz March 27, 2008 at 4:42 pm

My new company does this. Matches with company stock. I switch it out entirely every month.

Fiscal Musings March 27, 2008 at 5:07 pm

My contributions and the match go to the same place, but I allocate about 5% to company stock. Not too much, but I do want some exposure to the stock because of the company it is.

I would put some into company stock if you would feel comfortable buying it outside of your 401k. If not, then why would you want to own it inside?

Dad March 27, 2008 at 8:18 pm

I spread mine across several funds that are offered. I have none in the company stock and the company puts its match where I put my contribution. I like it like that. Company stock is an option but as Fiscal Musings said, if I wouldn’t buy it on the outside why would I buy it in the 401K. I used to work for a big Silicon Valley company. The company was very pro-employee and famous for it. However, over time as the founders became more distant and then passed away, the company pretty much like so many and thought of itself only rather than the employees. Loyalty is earned.

Eli March 27, 2008 at 9:26 pm

I agree we should all give when we can, and even stretch ourselves when we can’t, but that’s where the emotion and loyalty end for me. I’ll donate because I’m passionate about something, but would never base an investment on this. Only invest on fundamentals.

I believe Warren Buffet said, “Diversification is protection from ignorance,” meaning the less we know about an investment, the more important it is to diversify. But if we do our homework and are confident in the companies ability to perform, diversification becomes less necessary.

Brip Blap March 27, 2008 at 10:51 pm

If you work for a company and invest in the company stock, too, you are being foolhardy. By working there you have already invested a significant amount in the company – your future earnings. Don’t make the mistake of doubling down. Eli and Kiran, do you think you know enough about your company to be SURE it is healthy? Do you think Bear Stearns employees felt that way? Enron?

I’m an auditor by profession and I am amazed – AMAZED – by how much people believe that they “know” their companies are “strong.” You don’t. The numbers are constructed. Senior management does not tell the SEC everything, much less the Street or their employees. By investing in your company stock you are doubling your risk, so I sure hope you feel you are at least doubling your return.

Eli March 27, 2008 at 10:58 pm

Brip Blap – I agree with you. I don’t invest in stock of the company I work for. You’re right that company heads hide a lot from the SEC and Wall Street.

Ryan [email protected] March 28, 2008 at 1:49 am

Since I work for a non-profit, we don’t have employer stock to invest in. If we did have employer stock to invest in, I’d limit it to at most 5% of my total portfolio.

Right now, my retirement portfolio (which I track periodically at my blog) is 50% domestic stock market, 25% domestic bond, 25% international stock.

Dividend growth investor March 28, 2008 at 11:46 am

I do not hold company stock. The stock is already part of one of the major funds in which my 401K is invested.
I have also heard the story of Enron, Worldcom, Adelphia, Bear Stearns employees who put everything in company stock.. I guess people never learn from their mistakes.

Jon March 28, 2008 at 11:51 am

I don’t know if this is true for 401(k) matching contributions, but a lot of time sin an employee stock purchase plan you get a certain degree of built-in profit. For instance, my Dad’s employer lets employees buy shares at the lowest market price over a certain time period, regardless of what the current market price is. So as soon as he buys, he’s made some profit.

Does anybody have any insight on how that works with a 401(k)? I’m also curious if the difference in market price has to be counted as income.

Similar question… some types of companies, such as Canadian income royalty trusts, have an option to receive dividend payments in the form of new trust units. The cool part is the trust units are sold at a discount to the market price, usually 5%-10%. Again I’m curious whether the dividend income you report would be the market value of the new units or the price you paid for them.

Julie March 28, 2008 at 8:46 pm

I agree with Brip Brap too, it would be bad enough to lose my job without losing a lot of my money. Look at the poor Bear Stearns employees!! I’m sure that they thought their company was strong – it’s been around for more than 80 years.

My employee stock plan is similar to Jon’s dad’s, but I’m still not sure if it’s worth the risk (and my company has been around for almost 200 years).

Llama Money March 29, 2008 at 11:58 am

My company is a private corporation, so there’s no company stock to buy. If there was, I would pass. The only exception is if they offered an employee discount on stocks. For example, my wife’s company offers a 15% discount off the current stock price. Once she becomes eligible, we will begin to pick up a small amount.

Without a discount, I wouldn’t be interested in “doubling up”, like some people mentioned.

Dough Roller March 31, 2008 at 9:38 am

When I worked for a public company, I asked myself the following question: If I didn’t work here, how much, if any, would I invest in the company? The answer was zero, so I didn’t invest in the company. You should factor in incentives, such as with an ESPP, but on the whole most employees over-estimate what they think they know about the company. Either that, or they allow how they feel about their job dictate their investing decisions. Either way, it’s a dangerous road to travel down, IMO.

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