Employee stock plans. Bonuses with options. It is easy for some employees to amass big holdings of their employer's stock. But keeping a big chunk of your portfolio in a single stock is risky: If the company hits a rough patch, your investments will, too.
Marlene Roth, a longtime employee of MCI and Worldcom, found that out the hard way. She said she had nearly all of her non-401(k) investments in company stock and options, which became worthless after Worldcom filed for bankruptcy. In total, she estimates she lost around $800,000. "Once the bankruptcy came out — that's when it became clear that, yeah, it's all gone," she said. "All the savings were gone."
Roth's circumstances may be unusual — Worldcom's 2002 bankruptcy filing was, at the time, the largest bankruptcy filing in U.S. history and came after the company revealed it had improperly booked more than $3.8 billion in expenses — but investing in an employer's stock is not. According to a study by Towers Watson of the holdings in 100 very large employers' 401(k) plans, 75 percent maintained company stock among the assets. Within that group, about 40 percent of the plans had 20 percent of more of their assets in the stock.
Owning company shares is not a danger in itself, as long as employees have diversified their holdings. In fact, some employers see benefits in encouraging workers to invest in the company's stock. There's a belief that "if employees feel connected, they will have higher productivity in the workplace," said Marina Edwards, a senior consultant at Towers Watson.
Company stock has become somewhat less common overall in retirement plans; Fidelity Investments researchers found that within defined contribution plans, allocations to company stock averaged 14.6 percent as of June 30, down from nearly 20 percent in June 2007. But it persists at a number of large employers. According to research by Pensions & Investments newspaper, large companies including ExxonMobil, Chevron, and ConocoPhillips, had allocations to company stock in their investment menus in 2013 above 42 percent, higher than 2007 levels.