Many companies allow employees to purchase company stock inside their 401(k) plans. What’s more, company contributions are often in the form of company stock.
This can be an easy sell. After all, workers understand the industry, have a handle on what’s going on within the company and may even know the people running the organization. Plus it gives them a vested interest in the company where they spend 40 hours or more working each week.
But having too much of your retirement assets invested in company stock can be a risky strategy. Just ask anyone who had fallen in love with company stock while working for Enron or Worldcom when the firms collapsed. In fact, 57.73% of employees' 401(k) assets were invested in Enron stock as it fell 98.8% in value during 2001.
However, if you want to sell the company stock and reinvest the money in other options your 401(k) offers, there are often restrictions ...
For instance, some companies require employees hold employer-matched stock until they reach a certain age, or until a specific date. Or when administrative tasks are being performed, there could be a lockdown or blackout when account activity is frozen.
Either of these examples could spell disaster if the stock is taking a nosedive and you want to get out.
The good news is that effective May 19, 2010, for plan years that begin on or after January 1, 2011, employees will have more freedom to diversify out of company stock.
The new IRS rule requires that employees be allowed to move out of their company’s stock as often as they can move out of other investments offered in their 401(k) plan. This must be no less frequently than quarterly with at least three alternative options.
How much is too much company stock? Well, everyone’s tolerance for risk is different. But if the stock makes up 10% to 20% of your total investment portfolio, you might want to take a closer look to make sure you’re comfortable with the risk.
And at least now your ability to move out of it will be easier.