Target employees miss out on company's stock run

UPDATE: I received an e-mail from Target. The company said it does not decide where employees should invest their 401(k) money. That's up to the employee. I corrected the blog to reflect this.

However, the central premise to this post remains the same: Target employees suffered big losses in their 401(k) plans last year, due to the drop in Target's share price. And about 35 percent of the retirement plan's assets belongs to Target stock, a rather high number.

To be fair though, I included the entire e-mail I received from Target:

· The makeup of Target's 401(k) portfolio is determined not by Target, but by team members who choose from a wide variety of choices. In fact, Target offers a number of investment options, including funds that align an investor's risk perspective with expected retirement date. In addition, team members can choose from bond funds to domestic and international equity funds to real estate funds.

· Target matches team members' 401(k) contributions at a rate of S1-for-$1 up to 5% of pay. Target contributed $197 million in 2011 to the TGT 401(k) Plan. Team members can choose to have their company match automatically converted out of Target stock into other investments with no further action required.

· Target makes available free on-line financial advice to all 401(k) participants through the nationally-recognized firm, Financial Engines. For a modest fee, team members can choose to have Financial Engines manage their investment decisions for them.

· Participants in the 401(k) plan upon retirement can convert their balances into a lifetime annuity, helping to protect their financial security throughout their retirement years.

Top executives at Target Corp. are certainly enjoying the company's meteoric stock price run over the past few years, with several managers, including CEO Gregg Steinhafel reaping millions of dollars from exercising options and selling stock.

The same, however, can't be said for Target employees who devote some of their paychecks to the company's 401(k) retirement plan. In 2011, the fair value of the plan's assets, which is dominated by Target stock, lost $356.9 million compared to a gain of $734.5 million the previous year, according to documents filed with the Securities and Exchange Commission.

So why the difference between executive and worker? For one thing, Target executives enjoy stock incentive plans that allow them to profit from a long term boost in stock price. Steinhafel and other executives recently exercised stock options granted to them eight years ago.

By contrast, the health of employee 401(k) plans, especially ones in which employees invest mostly in the company's stock, depends heavily on the annual performance of the stock market.

For example, employees took a beating last year because of a 18.6 percent decline in Target's stock price in 2011.

For publicly-traded companies that offer 401(k) plans, employees who invest most of their money into company stock can be problematic. When the stock soars so does the plan's assets.

But when the stock sinks, employees can feel a whole lot poorer. And as Enron Corp. proved, a company's complete demise can wipe out 401(k) plans entirely.

For employees saving for retirement, Target stock would seem like a good investment. Since March 2009, the stock has more than doubled. But 401(k) plans can live and die by the performance of a single year.

For example, the company's stock price in 2009 rose about 40 percent. As a result, the Target Corporation Common Stock Fund jumped 36 percent, pushing the fair value of the 401(k) plan up $946.6 million.

But in 2008, the start of the Great Recession, Target 's stock fell 31 percent. The common stock fund subsequently fell 35 percent, wiping out a whopping $1.2 billion off the entire portfolio.

Over those two years, the Best Buy common stock fund lost a combined $81.3 million. But as bad as that sounds, it could've been much worse.

Unlike Target employees, Best Buy employees diversify their money across a broad range of funds beyond its stock. Six funds, including Galliard Stable Value Fund and PIMCO Total Return Fund, hold more than five percent of Best Buy's total 401(k) assets.

At $128 million, the Best Buy common stock fund represents about 13 percent of the $1 billion worth of retirement assets. Compare that to Target, in which its common stock fund makes up 35 percent of the entire portfolio.