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Money Matters for Seniors
Don't Get Carried Away Investing 401(k) Funds in
Company’s Stock
Was it too much of a
good thing for Enron employees?
By Robert Valentine,
Certified Senior Advisor
March 10, 2006 - Horror stories of Enron’s collapse
abound and anyone who’s aware of the rapid drop in Enron stock prices is
also aware of how quickly most employees lost their financial security.
All told, employees participating in Enron’s 401(k) plan lost massive
amounts of money, and in the case of WorldCom employees, they lost over
1 billion dollars. One of the biggest reasons for such a collapse in
401(k) savings was due to the large amount of Enron and WorldCom stock
employees held in their own plans.
While the outcome of the Enron collapse certainly
wasn’t pleasant, it at least allows us to step back and recall a few key
reminders when it comes to 401(k)s. Being loyal to ones company is
generally considered a very noble trait. You probably have a great deal
of pride in your work and in the company you work for. But, loyalty
aside, there is also something to be said about diversification.
Granted, you know your company better than most
other companies you could invest in, but in the end, they’re all
corporations, and the Enron employees thought they knew better, too. The
truth is, not all companies are doing as well as they claim. Even if
they are, there’s always risk in investing too heavily in your own
employer.
While people have become more aware of the dangers
of over-investing their 401(k) since the Enron and Tyco scandals, the
problem still exists. According to a 2004 survey by the Employee
Benefits Research Institute, 13% of those employees surveyed, had over
80% of their 401(k) allocated in their own company’s stock!
Expert recommendations vary. Generally, it is said
that you should have no more than 15% of your 401(k) invested in your
own company. That’s the maximum, but most experts believe you should
invest even less than that. (Most say 5-10%, or below is a good number.)
Most professionally managed, defined-benefit pension plans only contain
2% of the employers stock.
But there are exceptions to the rule. It’s
generally accepted that if your 401(k) plan is only one part of a much
larger retirement saving strategy that includes IRAs and other
investments. At that point, 15-20% of employees stock may be the right
amount, as long as the overall amount in all combined retirement
accounts is less than 10%.
Many people find it difficult not to invest in
their own companies heavily, given many of the incentives that are
available. Loyalty always plays a part in deciding whether or not to
invest in your own company. Your employer may be another deciding
factor. At Enron, they strongly encouraged employees to fill up their
401(k)s with company stock. By the time the bottom fell out, Enron
employees, on average, had 58% of their 401(k) invested in the company!
As with everything in life, sometimes you can have
too much of a good thing. It’s important to meet with a financial
professional whenever you’re deciding how to invest your 401(k). In
general, when it comes to your own company, you want to stick with the
5-10% rule within the 401(k), or less than 10% invested overall. It’s
also extremely important to periodically step back and make sure you’re
keeping your investments balanced and diversified.
Robert Valentine is a Certified Senior Advisor in
Huntington Beach, CA. He can be reached at (877) 732-2637.
About author
This article was submitted by Robert
Valentine of Financial and Retirement Management. Robert (CA Insurance
Lic #0C23496) is a Registered Representative of and offers securities
through Securities America, Inc., a Registered Broker/Dealer, Member
NASD/SIPC. Advisory services offered through Financial and Retirement
Management, a Registered Investment Advisory firm. Robert is a Certified
Senior Advisor in Huntington Beach, CA. Several of his articles on
financial planning matters that concern investors have been published by
SeniorJournal.com. Robert
can be reached at (877) 732-2637.
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