Don't be a company man
Even after Enron, people still load up their 401(k)s with company stock. That's a big mistake.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY Magazine) - You'd think that the recent publicity surrounding the fraud and conspiracy trial of former Enron execs Kenneth Lay and Jeffrey Skilling would be all the reminder anyone would need to steer clear of company stock in a 401(k).

After all, when Enron went belly up in 2001 amid allegations of cooked books, thousands of employees who had loaded up on Enron shares saw their retirement savings evaporate. But the message that your own company's shares can be dangerous to your financial health apparently hasn't entirely sunk in.

The ups and downs of company stock
Employer stock could make you rich, but poorer is more likely. If you're 35 and have a $50,000 salary and a $50,000 401(k) balance, here's what you could end up with.
401(k) value after 30 years, diversified:401(k) value after 30 years, 50% company stock:
Best case (5% chance)$1.9 million$3.8 million
Likely outcome (50% chance)$669,000$571,000
Worst case (5% chance)$236,000$110,000
Notes: Annual 401(k) contribution equals 9% of salary, which increases at inflation plus 1.5 percentage points. Company stock is a growth stock; diversified portfolio is a blend of domestic and foreign stocks and bonds.
Source:Financial Engines.

Company stock remains the single largest investment in 401(k) plans, accounting for 25% of assets in those that offer it as an option, according to consulting firm Hewitt Associates. And more than a fifth of plan participants have over half their balance invested in company shares.

What's the appeal?

"Many people think employer shares are a less risky option than a diversified mutual fund because they're familiar with their company," says Chris Jones, chief financial officer at 401(k) advice firm Financial Engines.

But that safety is an illusion. Buying your employer's stock, after all, amounts to placing two big economic bets on one company. If your firm suffers an Enron-type collapse - or even a less dramatic downturn - you could lose your job and a big portion of your retirement savings.

There's an even greater danger to investing heavily in your employer's shares: subpar performance. Generally, a single stock is twice as volatile as a diversified portfolio of stocks. Although all that bouncing around could lead to jackpot gains, more often than not it translates to a smaller account balance at retirement - and in some cases you could really get hammered (see the chart below).

So holding anything more than, say, 10 percent of your 401(k) in company stock is a lose-lose proposition: You're taking on more risk for what will likely be a lower return.

Convinced? Good. But how are you supposed to get those employer shares out of your 401(k)?

See if you're locked in

You'll typically have no problem transferring out of company stock you bought with your own contributions. Likewise, you can sell company shares you bought of your own accord with funds that your employer contributed to your account as part of its matching program.

But if your employer required you to take the match only in company stock, you may face some hurdles in unloading your shares.

Some employers, for example, allow you to move such matching company stock only after you're vested in the matching contribution. Others will make you wait until you're 55 or older and have been in the 401(k) at least 10 years to start selling the shares.

Still, in the wake of the Enron fiasco, more firms are loosening or even eliminating restrictions. Today, 46 percent of companies that match exclusively in company stock allow participants to move out of those shares at any time - up from just 15 percent in 2001 - while only 4 percent bar transfers altogether.

Pension-reform legislation now wending its way through Congress could also make it easier to get out of company stock. Your HR department can tell you what restrictions, if any, apply to company stock in your plan.

If you can sell, then do sell

Generally, moving out of your company stock all at once makes the most sense since that gets you to a lower-risk portfolio more quickly. As the Nike ads say, Just do it. But if you're worried that this might mean selling at a particularly low price, you can transfer out gradually over several months.

Either way, the aim is the same: to create a more balanced portfolio of stocks and bonds that suits your age and risk tolerance.

For help figuring out the best mix of investments for your situation, you may be able to turn to your plan for guidance, as more than half of 401(k) plans now offer advice.

Otherwise, check out the Fix Your Mix tool here at CNNMoney.com. Or, assuming your plan offers it, simply invest in a target-retirement fund, which gives you an instantly diversified portfolio appropriate for your age.

If you're stuck with the stock, diversify around it

You can dampen the risk of company stock you're not allowed to sell by rejiggering the other assets you own, both within and outside your 401(k), to create a more balanced mix overall.

For example, if you work for a technology firm, you might boost your holdings in bonds, value-oriented stocks and foreign funds, all of which can serve to offset the risk of your firm's high-octane growth shares.

If your plan doesn't offer guidance on this issue, you can consult an independent adviser or sign up for a service such as Financial Engines, which provides online 401(k) investing advice to individuals for a fee (starting at $39.95 per quarter).

Or you can check out RiskGrades, a free site that assigns risk ratings to portfolios based on how different holdings zig and zag relative to one another. After plugging in all your investments, including your company shares, you can try different combinations until you arrive at a portfolio with a lower risk rating.

What you definitely do not want to do, however, is ignore the potential for havoc that owning company stock presents for your 401(k) and your retirement plans. One Enron is more than enough.

____________________

Sign up for Updegrave's weekly e-mail newsletter at cnnmoney.com/expert. E-mail him at longview@moneymail.comTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.