Employees often have too much of their employer’s company stock in their 401(k) or other retirement plan. Employees feel they know their company best, overlooking the risks of having too much of an investment in any one company, including their own.
What are some of the risks of loading up on your employer’s stock?
* Tremendous bet in a “safe haven.” 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.
* Double whammy potential. No company is protected from economic downturns. If your employer’s performance weakens, you may lose your job, as well as growth in your retirement portfolio from the company’s market value.
* 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.
* Tendency to forget. 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.
Your goal should be to create a well-balanced portfolio that suits your age (investment horizon) and your risk tolerance. Call us for assistance in reviewing your retirement situation.David Bradsher, CPA