Having Too Much Employer Stock In Your 401(k) Is Dangerous. Just Look At GE

Ted

FYI: Average on Tuesday, many participants in its 401(k) retirement plan were likely in shock. Over one-third of the plan’s assets have been invested in the shares of General Electric, as shown by the company’s federal filings. Its share price has fallen by 60% since the end of 2016, as the S&P 500 has risen by over 25%.

Similarly, participants in the 401(k) retirement plan at Scana—a natural gas company in Georgia—have suffered heavy losses from inadequate diversification. Over 60% of the plan’s assets were invested in Scana stock, as shown by the company’s federal filings. Its share price fell by nearly 50% since the end of 2016.

As these examples illustrate, holding a large portion of your retirement assets in your employer’s stock is dangerous for your financial health. Such a large concentration undermines the risk-reducing benefits of a diversified securities portfolio. Indeed, a large holding in employer stock doubles your risk: If your company runs into major problems, you may lose your job and your retirement security.
Regards,
Ted
http://fortune.com/2018/06/20/general-electric-dow-jones-401k-retirement/

Sven

Don't forget Enron.

BrianW

It is so hard to convince people when their stock is considered bullet proof. I wonder how Jack Welch feels about GEs demise.

jlev

From an investing standpoint it seems a terrible idea. But from a corporate governance standpoint, wouldn't a pension plan or union holding significant stock in its own company provide incentive for the company to adopt more worker friendly policies? Raises rather than buybacks, focusing on employee benefits etc.

BrianW

@jlev: I would think fiduciary duties would dictate not having significant (if any) holdings of its company stock.

jlev

@BrainW: Traditionally and logically yes. I'm just pondering the fact that shareholder value is A/The dominant philosophy on governance. And if workers would like to have their interests represented in the boardroom, it seems like a promising way to do that.

BrianW

@Jlev: I believe it would be a dangerous thing to do. Just prior to Enron's collapse, the powers-that-be, initially touted the strength of the company. Just before the collapse, they sold while freezing the accounts of the workers. The workers never recovered. Company stock and pensions should not be in the same place at the same time, unless independent 'managers' choose to buy it. I see where you're going but I don't believe pensions would be the correct leverage/vehicle.

BrianW

@Jlev: Let's say you had an environment where the employee pension was solely represented by company stock. Who would make the buy and sell decisions? If it is the board, their fiduciary responsibility is only for the health of the company and by extension stock price. Let's now say the employees have a grievance and desire to use their stock-ownership-clout to effect change. At this point your alignment of interest could be in conflict, who decides? A bad sell/buy decision could cripple the company and pension.

dstone42

It's not really germane to the point of the story, but SCANA is a regulated electric utility and natural gas company based in South Carolina. (The "SC" is pretty much a dead giveaway.)

How did the Fortune authors get it wrong? The second author, an undergraduate who "provided research assistance" will probably get the blame.

SCANA is to be bought by Dominion Energy, after the partnership with SCE&G to build nuclear power plants encountered huge cost overruns (and lots of political turmoil in South Carolina).
I don't think I'd be buying Dominion stock right now.

Tarwheel

Are GE pensioners at risk? I have several retired friends who are former GE employees and receive pensions that I presume are large portions of their income. I asked one of them and he didn’t seem too concerned or aware of GEs troubles, which seemed odd to me.

VintageFreak

I've suffered this big time through my wife's 401k. That said, as echoed above, no one is going to listen. AND for good reason. Imagine investing in 401k if you worked for a big bank in 2009. You could retire.

BlockChain bubble is coming and will make some millionaires.

msf

Section 407(a)(2) of ERISA (29 USC § 1107) generally limits traditional (defined benefit) pension plans to acquiring no more than 10% of the stock of an employer. This is noted in the article.

So while there can be some risk to pension plans, they're not going to go bust simply because the employer did. The fact that ERISA allows limited investments by a plan in employer stock answers the question of whether there is a fiduciary duty to eschew this stock. There isn't.

But there's still the usual fiduciary requirement that the selection of investments by the plan (whether company stock or anything else) be prudent.

This is a different question from whether individuals ought to buy company stock in their defined contribution (DC) plans (where there is no 10% limitation).

There are NUA rules that allow company stock appreciation to be taxed as cap gains instead of ordinary income, as is the usual case for anything else held in a DC plan. That changes the risk/benefit calculation a bit, encouraging some investment in employer stock with a DC plan. But one still shouldn't go overboard.

https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/

Finally, with respect to SCANA, the article may have been poorly worded, as opposed to factually incorrect. SCANA Energy, a company owned by SCANA Corp, services only Georgia, and provides only natural gas (as noted in the article). That appears to be the company the article is referring to.
https://www.scanaenergy.com/

SCANA Corp has several subsidiaries including South Carolina Electric and Gas.
https://www.scana.com/

BrianW

@Tarwheel: no one is suggesting the GE pension is at risk. We were going through a hypothetical situation only.