Employees often have too much of their employer's company stock in their 401(k) or other retirement plan. That's because employees tend to feel like they know their companies best. Here's the problem: they may be overlooking the risks of having too much of an investment in any one company.
Here are some of the risks of loading up on your employer's stock:
- The safe-haven effect. Overweighting investment holdings in any company minimizes diversification, exposing your portfolio to increased risk. The belief that employer shares are less risky is an illusion.
- The one-two punch. No company
is protected from economic downturns. If your company's performance
weakens, you may lose your job at the same time as its declining stock harms
your retirement portfolio.
- Lock-up periods. Some companies prohibit employees from converting the employer retirement match contributions in company stock into other investments until after a number of years. In this case, use your own contributions to diversify your holdings.
- Forgetting risk. As you move
closer to retirement, you may forget the riskiness of your employer's
stock to your portfolio. At the same time, contributions of company stock
may be growing, based on higher benefit matches — just when portfolio
reallocation is becoming more important.