Employer stock via 401k same risk as personal investment?
Employer stock via 401k same risk as personal investment?
Does investing in your employer stock follow the same market risks as investing through your personal investment stock trading account? I don't get why the stock price for my company is like over $100 in the public market but it's $42 in the 401k plan?
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Re: Employer stock via 401k same risk as personal investment
Probably because your employer contributes to the purchase when you do it in your 401K.
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Re: Employer stock via 401k same risk as personal investment
It's also possible you cannot directly purchase your employer's stock in your 401(k)... it's possible that you have a fund in your 401(k) which in turn invests almost entirely in your employer's stock.
That's definitely how my employer's 401(k) works... my 401(k) contains a "Company Common Stock Fund" (as of June the fund was allocated 98.5% my employer's stock and 1.5% cash) and since it is a [unitized stock] fund the price doesn't have to be directly equal to the price of each share of stock (indeed, 1 [unit] of my "Company Common Stock Fund" is less than half the cost of 1 share of my employer's stock). The important thing is that the fund should (and in my employer's case has) closely followed the actual stock (e.g. on Friday my employer's stock closed up 1.04%... and the common stock fund in my 401(k) also closed up 1.04% as one would expect).
[Edit: the fund in my 401(k) is an unitized stock fund per Alan S' awesome response below]
That's definitely how my employer's 401(k) works... my 401(k) contains a "Company Common Stock Fund" (as of June the fund was allocated 98.5% my employer's stock and 1.5% cash) and since it is a [unitized stock] fund the price doesn't have to be directly equal to the price of each share of stock (indeed, 1 [unit] of my "Company Common Stock Fund" is less than half the cost of 1 share of my employer's stock). The important thing is that the fund should (and in my employer's case has) closely followed the actual stock (e.g. on Friday my employer's stock closed up 1.04%... and the common stock fund in my 401(k) also closed up 1.04% as one would expect).
[Edit: the fund in my 401(k) is an unitized stock fund per Alan S' awesome response below]
Last edited by DavidC on Sat Oct 26, 2013 10:46 pm, edited 1 time in total.
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Re: Employer stock via 401k same risk as personal investment
You may have a more than a market risk, rather a diversification risk. If your company does poorly and the shares drop as a result, this could also lead to employment risk. For that reason, it is recommended not to get too top heavy in employer stock shares.
If the stock pays a dividend, the dividend is also probably being reinvested in more shares, or in the case of a "unitized stock fund", more units.
Because of all the recent "stock drop suits", your plan probably offers you various opportunities to diversify out of the stock fund, so that might be worth consideration at some point.
You may be aware of "NUA" tax breaks, but diversification should always trump the benefits of an NUA based tax break (LT cap gain rates on the appreciation of the shares).
If the stock pays a dividend, the dividend is also probably being reinvested in more shares, or in the case of a "unitized stock fund", more units.
Because of all the recent "stock drop suits", your plan probably offers you various opportunities to diversify out of the stock fund, so that might be worth consideration at some point.
You may be aware of "NUA" tax breaks, but diversification should always trump the benefits of an NUA based tax break (LT cap gain rates on the appreciation of the shares).
Re: Employer stock via 401k same risk as personal investment
You also cannot declare capital loses in your 401(k) to offset capital gains on your income tax.
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