A welcome trend in retirement savings is the movement away from employers allowing employees to buy company stock in the 401(k) plan or making the employers match in company stock.
The Employee Benefits Research Institute, a Washington D.C.-based think tank, reported that 401(k) participants’ investments in company stock is at historically low levels. Only 7 percent of 401(k) assets were invested in company stock at year-end 2014, down from 19 percent of assets in 1999. Recent hires also are less likely to hold company stock in the retirement savings plan than long-term employees, EBRI reports.
This isn’t a brief against owning individual stocks. The issue is the wisdom of putting retirement savings into a single stock. Even with good companies the basic problem is too much concentrated risk. Not only do you get your paycheck from the company but the health of your retirement savings may become too dependent on the performance of one stock.
The experiences of employees at Enron, Bear Stearns, and Lehman Brothers — to name only a handful of basket cases — offer ample warning. Employees lost their jobs and much of their retirement savings when their companies foundered. For example, thousands of Enron workers lost their jobs when the company got into trouble. Many more watched their retirement savings vaporize by the energy company’s collapse. Enron’s employees had invested a big chunk of their tax-deferred retirement savings in Enron stock.
Diversification, the notion of not putting all one’s eggs in one basket, is a time-honored and sensible risk-reduction strategy with retirement savings. The Talmud recommends it: “A man should always keep his wealth in three forms; one third in real estate, another in merchandise, and the rest in liquid assets.”
Sancho Panza, squire to Don Quixote, wisely noted: “It is the part of a wise man to keep himself today for tomorrow and not venture all his eggs in one.”
Modern finance has updated the insight for the construction of a well-diversified portfolio of stocks, bonds and cash, but the fundamental idea remains the same.
Don’t get me wrong. There is nothing wrong with owning individual stocks. Buying stocks is fun, too. You are matching your wits against the market. However, I wouldn’t do it in retirement savings plans. Far better to own individual stocks in a taxable account. This way, if your financial bet doesn’t work out you can always use the tax code to reduce your losses.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.