Should Employees Own Stock in Their Company?

Following the recent news on the Bernie Madoff scandal and how investors have potentially lost up to $50 Billion in assets, and while it's too late for these unfortunate individuals who were duped by a seemingly legitimate investment that was performing well, it's not too late for routine workers and retirees with company holdings. Recently, I provided a snapshot of how 401K assets are distributed in the US and it revealed a disturbingly high concentration of assets in company stock. Subsequently, I shared my own personal 401K asset allocation.

While my 4% company stock allocation is relatively low, I'm thinking perhaps it should be ZERO.

Why? Consider that:

• My company is my primary source of income. If something catastrophic happens to the company, our income is completely cut off.
• I routinely receive stock option grants. If the stock performs well, these options end up in the money and I can benefit from a rising share price in that manner.
• If I'm holding shares in my 401K, I'm now subjected to triple jeopardy. If the shares go to zero or something close to it, my options are worthless, my 401K allocation has dropped to zero and I'm likely to be out a job. 0 for 3!

Why subject yourself to undue risk for no discernable benefit?

Employees like to think they know a thing or two about their company (note that it's illegal to trade on it if you actually do and the public doesn't!). Employees also have a tendency to become emotionally attached to their company's prospects and make irrational assumptions about future performance compared to peer investments. Statistically speaking, why would your company outperform the general market over any other company during any particular time period?

While there are some lucky souls who owned their Microsoft (MSFT) stock through the 80s and Google (GOOG) post-launch, conversely, there are employees who lost everything with Enron, or nearly everything with the likes of Lucent (LU). You're probably just better off having your money invested in a diversified sector fund or ETF if you have this much vested in your company. And that means I should get my company allocation down to zero for the new year!

Comments

[notsosmart:]

you might want to hold some for public relation reasons.it could be a small amt.

2008 Dec 19 01:20 PM

[Mike Alfred:]

Starting Jan 29, 2009, you will be able to see how much company stock is in many of the large company 401k plans in America. If company employees have a disproportionate share of their 401k investments in company stock, there is a much higher fiduciary risk to the plan sponsor. brightscope.com.

Jan 14 03:08 PM