Should you own company shares in 401(k)?

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carmonkie
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Should you own company shares in 401(k)?

Post by carmonkie » Fri Feb 22, 2019 2:48 pm

This has been a rough week at Megacorp, and for many co-workers retirement accounts it has been a disaster, our stock took a massive dump on Monday >60% and still bleeding. I count my self as one of the lucky ones that I did not own any shares as I sold off every time and re-allocated to index funds as we got our 401(k) match and I also never bought shares even thought it was an option.

I know there have been a lot of questions if you should own company shares in the 401(k), and hope you can use this as a definite you should not. I am not an individual stock trader so I do no need to hold on to something just out of emotion. If people were lucky to enter a sell order before 3PM, they might have save some otherwise they have lost a lot.

Learn from other peoples mistakes and woes, if you get 401(k) in cash or your asset allocation count your blessing, but if you get company stock, sell and diversify. I hope this never happens to anyone here. I see it all around me and it is a sick feeling. My company was (still is as of today part of the S%P 500 so I already owned my shares).

Thanks for reading..

nolesrule
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Re: Should you own company shares in 401(k)?

Post by nolesrule » Fri Feb 22, 2019 3:03 pm

If you are, limit your exposure. My wife's 401k match is in her MegaCorp stock. We keep a tight leash on how much we hold, and we don't buy more. Only about 30% of the money in her 401k that is attributable to employer match is still in company stock. We've been fortunate that since 2011 her MegaCorp has done rather better than the S&P500/TSM, but we know it's still a gamble, and that's why we limit our exposure and "pull winnings off the tables".

teamDE
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Re: Should you own company shares in 401(k)?

Post by teamDE » Fri Feb 22, 2019 3:06 pm

I just sold the last of my old employer stock fund in my 401k three days ago. My wife gets company RSUs and we sell off between 50-75% of them. This story (and many like it) certainly helps bring us back to reality.

Thanks for sharing and good luck.

z3r0c00l
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Re: Should you own company shares in 401(k)?

Post by z3r0c00l » Fri Feb 22, 2019 3:09 pm

Just think of employees at Kraft Heinz this week if they were heavily into the company stock. Not only are they down 30% on the day, but they now realize their company could be in serious legal trouble. The stock could even go to zero over the next few years and there will be layoffs too. So do you sell now and lock in losses? Or hope for a recovery? If you have 1000 eggs, better to use 1000 baskets.
Last edited by z3r0c00l on Fri Feb 22, 2019 3:16 pm, edited 1 time in total.

nick evets
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Re: Should you own company shares in 401(k)?

Post by nick evets » Fri Feb 22, 2019 3:12 pm

carmonkie wrote:
Fri Feb 22, 2019 2:48 pm
This has been a rough week at Megacorp, and for many co-workers retirement accounts it has been a disaster, our stock took a massive dump on Monday >60% and still bleeding. I count my self as one of the lucky ones that I did not own any shares as I sold off every time and re-allocated to index funds as we got our 401(k) match and I also never bought shares even thought it was an option.

I know there have been a lot of questions if you should own company shares in the 401(k), and hope you can use this as a definite you should not. I am not an individual stock trader so I do no need to hold on to something just out of emotion. If people were lucky to enter a sell order before 3PM, they might have save some otherwise they have lost a lot.

Learn from other peoples mistakes and woes, if you get 401(k) in cash or your asset allocation count your blessing, but if you get company stock, sell and diversify. I hope this never happens to anyone here. I see it all around me and it is a sick feeling. My company was (still is as of today part of the S%P 500 so I already owned my shares).

Thanks for reading..
What Megacorp fell more than 60% on Monday? Wasn't that President's Day, anyway?

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mfswatz9
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Re: Should you own company shares in 401(k)?

Post by mfswatz9 » Fri Feb 22, 2019 3:15 pm

One of my good friends had her total savings in Enron stock. She is now a widow and having to live very frugally.

Topic Author
carmonkie
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Re: Should you own company shares in 401(k)?

Post by carmonkie » Fri Feb 22, 2019 3:19 pm

nick evets wrote:
Fri Feb 22, 2019 3:12 pm
carmonkie wrote:
Fri Feb 22, 2019 2:48 pm
This has been a rough week at Megacorp, and for many co-workers retirement accounts it has been a disaster, our stock took a massive dump on Monday >60% and still bleeding. I count my self as one of the lucky ones that I did not own any shares as I sold off every time and re-allocated to index funds as we got our 401(k) match and I also never bought shares even thought it was an option.

I know there have been a lot of questions if you should own company shares in the 401(k), and hope you can use this as a definite you should not. I am not an individual stock trader so I do no need to hold on to something just out of emotion. If people were lucky to enter a sell order before 3PM, they might have save some otherwise they have lost a lot.

Learn from other peoples mistakes and woes, if you get 401(k) in cash or your asset allocation count your blessing, but if you get company stock, sell and diversify. I hope this never happens to anyone here. I see it all around me and it is a sick feeling. My company was (still is as of today part of the S%P 500 so I already owned my shares).

Thanks for reading..
What Megacorp fell more than 60% on Monday? Wasn't that President's Day, anyway?
Well Tuesday, it seems that long of a week.

alamo
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Re: Should you own company shares in 401(k)?

Post by alamo » Fri Feb 22, 2019 3:38 pm

mfswatz9 wrote:
Fri Feb 22, 2019 3:15 pm
One of my good friends had her total savings in Enron stock. She is now a widow and having to live very frugally.
Ditto, had neighbors both husband and wife worked for Enron and lots of investments were in Enron stock. Both laid off and investments at basically zero after the collapse.

Your employment with a company IS your investment with the company.

Any company stock with your employer should be replaced with other investments as quickly as possibly, barring possibly waiting for long term cap gains, etc in taxable accounts.

jminv
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Re: Should you own company shares in 401(k)?

Post by jminv » Fri Feb 22, 2019 3:44 pm

It's a nice reminder not to put all your eggs into one basket.

You see people around here sometimes not wanting to sell because they 'know' their company and 'know' the industry. It's a sure winner so they fail to diversify. Diversification is a great thing. It's doubly risky to be invested in the same people you rely on for your job. When your company is having problems your investment can crater and you can be out of a job. Enron is a common example of when it goes spectacularly wrong but there are many other not outright fraud cautionary tales. It sounds like with your company that investors have decided they might go bankrupt after news on Tuesday. Stamps.com employees who held would also have had a rude shock after yesterday's news (>50% drop on news of ending USPS arrangement). Lots of others with suboptimal results, doesn't have to go bad spectacularly to be a poor decision. On the spectacular side, knew executives I worked for who held onto their options instead of exercising and lost millions when they became worthless after a corporate action.

Inframan4712
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Re: Should you own company shares in 401(k)?

Post by Inframan4712 » Fri Feb 22, 2019 5:24 pm

I worked for a (non-famous) Megacorp in the 90s during my early career. For about 5 years. Every time I got a company stock distribution I sold it and bought Magellan. My girlfriend and future wife did not sell. Every quarter we had a division meeting and our vice president encouraged us to buy more company stock. Four years in, company stock fell 75%. Executives were investigated for selling their stock prior to the crash, but nothing ever came of it.

It was a lesson learned for my wife. Not terribly expensive since we were just starting out, but it was a lot of money at the time for her.

At the (small) company after that, I received stock options. I also immediately sold as soon as I could. None of the other 10 people in my office sold. i was the only one to make any money, because of course it crashed quickly.

Never, ever, ever, ever, ever would I hold company stock at my job. But then I would have missed out on Apple, I suppose. Still, that's like winning the lottery. Or stock picking in general.

Grt2bOutdoors
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Re: Should you own company shares in 401(k)?

Post by Grt2bOutdoors » Fri Feb 22, 2019 5:33 pm

z3r0c00l wrote:
Fri Feb 22, 2019 3:09 pm
Just think of employees at Kraft Heinz this week if they were heavily into the company stock. Not only are they down 30% on the day, but they now realize their company could be in serious legal trouble. The stock could even go to zero over the next few years and there will be layoffs too. So do you sell now and lock in losses? Or hope for a recovery? If you have 1000 eggs, better to use 1000 baskets.
The amount of the procurements under investigation by the SEC is $25 million. The company makes $11 Billion in annual procurements. Serious legal trouble? That sounds like a stretch, but let's say you're right and it's more than $25 million, it's not the company that will be in trouble, it will be the management who failed to disclose the true picture. Kraft is not going to zero, they sell tangible goods with real sales, that's not disappearing now or in the next few years. I'm off to the grocery store, need some Kraft singles...... :P
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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LilyFleur
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Re: Should you own company shares in 401(k)?

Post by LilyFleur » Fri Feb 22, 2019 6:06 pm

It's a big gamble.

At my former Fortune 500 employer, in the 1990s, workers in the mailroom--who had participated in the matched savings plan for a long time and held a good amount of their savings in company stock--became millionaires.

averagedude
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Re: Should you own company shares in 401(k)?

Post by averagedude » Fri Feb 22, 2019 6:13 pm

My thought is, if you are putting a significant amount of your 401K contributions in company stock, you are swinging for the fences,trying to hit home runs. I believe it is best to have a financial plan where you can hit singles and still win the game. Having a game plan where you get rich slowly, is much safer than implementing strategies to get rich quick.

dbr
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Re: Should you own company shares in 401(k)?

Post by dbr » Fri Feb 22, 2019 6:19 pm

LilyFleur wrote:
Fri Feb 22, 2019 6:06 pm
It's a big gamble.

At my former Fortune 500 employer, in the 1990s, workers in the mailroom--who had participated in the matched savings plan for a long time and held a good amount of their savings in company stock--became millionaires.
The same was true at my company. But the only thought that can apply is that ignorance is bliss.

apple44
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Re: Should you own company shares in 401(k)?

Post by apple44 » Fri Feb 22, 2019 6:30 pm

I would say that's a big NO-NO!

You are already working in that company, and that's a big reliance -- you totally rely on that company to pay your wages, insurance and other benefits on time. You shouldn't be relying on the company for your 401(K), no matter how great that company seems or what other people say.

I was a summer intern at Lehman Brothers during the summer of 2008. They had a fantastic summer program. The people I worked with were encouraging me to buy Lehman stock, because at the time Lehman stock was around $15 and they thought it should be worth around $30, and that it's a good time to buy in. Still in school, I didn't know much about investing and I thought surely these financial analysts knew what they were talking about, and who else would be more familiar with the company's performance and prospect than its employees? I was going to open an account and buy Lehman stocks except that I got lazy and distracted (hey, I'm in NYC and there's so much to do other than opening an investment account!) and never got around to open an account for that purpose.

Then came the morning of September 15. I woke up and turned on the radio as I always do in the morning, and I heard Lehman filed for bankruptcy. I was literally stunned. Later I got in touch with the people I worked with. Luckily, they were all able to join Barclays and keep their job, but their Lehman stock, including the Lehman stock in their 401(K) now became zero.

Somebody here also mentioned Enron. I heard stories about Enron a lot now because I'm in Texas. It seems everybody is connected in some way with Enron because they were soooooo big at one point and the stories... let's just say, they are not pleasant to hear.

bluquark
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Re: Should you own company shares in 401(k)?

Post by bluquark » Fri Feb 22, 2019 8:31 pm

Because every post always repeats the same mantra in these threads, I'll change things up a bit with a limited defense of holding company shares.

1. The expense ratio is *zero*, and according to portfolio theory, the expected return is the same as the overall market.
2. The risk of course is much higher than the overall market, but that risk is symmetric -- almost everyone who got filthy rich (as opposed to Boglehead rich) did it with a large equity position in a single stock, held for a very long time (usually because they are a founder or early investor of the company).
3. If your company is large conglomerate, it has a fair degree of internal diversification already.
4. Company stock often comes in as some manner of bonus compensation on top of normal salary, so most holders of it have a greater capacity to absorb risk than the average saver.

Do I think it's unnecessary and a mistake for most people? Yes. At the same time, in the continuum of investment mistakes, it's not clear to me that it's as bad as other common mistakes such as holding a large amount of gold, bitcoin, 2% ER mutual funds, or maybe even checking account cash, since all of those things have expected return much less than the overall market.
Last edited by bluquark on Fri Feb 22, 2019 8:42 pm, edited 2 times in total.

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Earl Lemongrab
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Re: Should you own company shares in 401(k)?

Post by Earl Lemongrab » Fri Feb 22, 2019 8:32 pm

It's really no different than any other bet on an individual stock. If anything worse, as noted with the Enron situation you might lose your job and your 401(k).

Some people do it to show "loyalty" to the company. Eh. The company doesn't care.

Some people think they have extra information that gives them insight into price inefficiency. Trust me, you don't know anything. If you do actually know something, then it's insider trading and against the law.

I cleared all the MegaCorp stock out of my account over ten years ago. These past few years, MegaCorp has been on a tear and the stock has well out-performed the broad market. But I had no way of knowing that. And it could end tomorrow with the right bad news.

NewOldGuy
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Re: Should you own company shares in 401(k)?

Post by NewOldGuy » Fri Feb 22, 2019 10:13 pm

Sometimes it's just easy to accumulate company shares. Stock options, profit sharing, preferred stock, ESOP, NAV pricing, etc., make company stock enticing. Many companies have banned employees from buying new shares and/or owning any shares of company stock in their 401K.

My wife's megacorp forced us to move/sell company shares or "we'll move them for you" and that was about 5 years ago.

AlphaLess
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Re: Should you own company shares in 401(k)?

Post by AlphaLess » Fri Feb 22, 2019 10:30 pm

KHC??
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

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Darth Xanadu
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Re: Should you own company shares in 401(k)?

Post by Darth Xanadu » Fri Feb 22, 2019 10:48 pm

Earl Lemongrab wrote:
Fri Feb 22, 2019 8:32 pm

Some people do it to show "loyalty" to the company. Eh. The company doesn't care.
Or know, for that matter. No one is monitoring 401k holdings of employees to see if they are holding or selling company stock. I've talked to folks at my company who don't want to participate in ESPP because they don't want to be viewed as a "flipper" upon sale of the stock. I happen to know that nobody looks at who is selling the ESPP shares, other than strictly from a reporting / W-2 perspective.

On the other hand, I've worked for a firm that offered a voluntary deferred comp option to senior execs to put money into the fund, and if you didn't commit a substantial percentage, you weren't likely to be asked again. In hindsight, I only wish I had been given that "offer".
"A courageous teacher, failure is."

Church Lady
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Re: Should you own company shares in 401(k)?

Post by Church Lady » Fri Feb 22, 2019 11:08 pm

To be fair, we should mention there are tax benefits to holding company stock in a 401K:
https://www.fidelity.com/viewpoints/per ... pany-stock

but you have to wait until distribution time before you can realize it, and you have to follow rules per the article I cited. Also, the tax benefit doesn't make sense if you lost money on the stock since it was credited to your 401K. And the law could change by the time you are ready to realize the benefit!
What if you took all that risk for no benefit? :oops:

If you work for a Megacorp, chances are every time you invest in a large cap mutual fund, you're literally buying shares of your own company. If you buy cap weighted index funds, you can quickly and unwittingly become over weighted (holding more than 5% of your net worth in your own company). :oops:

All that said, it's probably not a disaster for a young person to have a small holding in company stock in the 401K. But IN MY OPINION that holding should be divested as the person gets older and more
invested in their company.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity.

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