401(k) Stock Fund vs. Company stock price

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Topic Author
PoemMan
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401(k) Stock Fund vs. Company stock price

Post by PoemMan » Mon Jun 10, 2019 7:05 am

Background:
I am retired and still retain a small amount of funds in a past (small mega corp) employer’s 401(k), with some of it allocated to their “Stock Fund”. That small mega corp will be merging with another of similar size in a “merger of equals”, to supposedly form a medium mega corp. There will be a two week blackout period during which no actions will be possible with the Stock Fund, after which there will be a conversion to a new combined Stock Fund, at the rate of 1:1.3.

Researching whether I should roll over this 401(k) into a much larger established rollover account prior to the blackout period, I noticed that the current stock market price of the company is approximately twice of each “share / unit” of their Stock Fund. This Stock Fund is made up of ~98% of the company stock.

Is there an explanation for this? FIDO manages the 401(k), and could not adequately (IMO) answer this question (“due to the mix of stocks invested in the Fund”).

[BTW, even though the amount in this Stock Fund is ~2% of my portfolio I am not inclined to accept the conversion and instead roll over the funds, since I will not know how much the new Fund will cost per unit.]

Thank you for any insight.

nolesrule
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Re: 401(k) Stock Fund vs. Company stock price

Post by nolesrule » Mon Jun 10, 2019 7:20 am

Company stock funds are essentially like a mutual fund or Collective Investment Trust where it solely holds the company stock and probably some cash for liquidity. The performance should be identical to the actual stock less a little cash drag, so price per share is irrelevant.

HomeStretch
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Re: 401(k) Stock Fund vs. Company stock price

Post by HomeStretch » Mon Jun 10, 2019 7:37 am

If you are considering rolling over a former employer 401k account that includes Company stock, check into whether NUA (net unrealized appreciation) might be of tax benefit to you. Not an expert on it, it just comes to mind with your mention of former employer stock.

Topic Author
PoemMan
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Joined: Sat Jul 16, 2016 10:26 pm

Re: 401(k) Stock Fund vs. Company stock price

Post by PoemMan » Mon Jun 10, 2019 8:56 am

nolesrule; the NAV is ~$117, compared to the stock price of ~$258, with ~98% of the holdings in the company’s stock and the balance in cash as you suggested. Still not sure why the significant difference, unless it is the core definition of NAV versus the stock (market) value.

HomeStretch; I will research the NUA aspects.

Thank you!

Yohanson
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Re: 401(k) Stock Fund vs. Company stock price

Post by Yohanson » Mon Jun 10, 2019 9:42 am

PoemMan wrote:
Mon Jun 10, 2019 8:56 am
nolesrule; the NAV is ~$117, compared to the stock price of ~$258, with ~98% of the holdings in the company’s stock and the balance in cash as you suggested. Still not sure why the significant difference, unless it is the core definition of NAV versus the stock (market) value.

HomeStretch; I will research the NUA aspects.

Thank you!
My company stock fund is the same way. Its NAV is $98 and its stock price is $172. I have about 1.75X the equivalent shares in that fund. Why it's done this way is a riddle to me.

nolesrule
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Re: 401(k) Stock Fund vs. Company stock price

Post by nolesrule » Mon Jun 10, 2019 1:27 pm

Because the NAV price is just a share price for the fund. It doesn't have to be a multiple of the stock prices being held. Look at a mutual fund compared to its underlying holdings

Think about it this way, the stock fund could have started at a specific per/share price that had nothing to do with the stock price at the time the fund was created. The stock or the fund could have gone through splits or reverse splits over time, and not at the same time. Additionally, does it distribute and reinvest dividends (if they are issued) or does it just accumulate in the NAV? That would also further separate the correlation.

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Stinky
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Re: 401(k) Stock Fund vs. Company stock price

Post by Stinky » Mon Jun 10, 2019 2:18 pm

PoemMan wrote:
Mon Jun 10, 2019 7:05 am

[BTW, even though the amount in this Stock Fund is ~2% of my portfolio I am not inclined to accept the conversion and instead roll over the funds, since I will not know how much the new Fund will cost per unit.]
You may very well want to roll over the funds. But I wouldn't use "I don't know how much the new Fund will cost per unit" as the sole reason to roll over the funds.

As explained in responses above, the price of the Fund is decoupled from the price of the stock. So the unit price of the Fund is kind of irrelevant.

I expect that the merger premium (or discount) is already priced into the public value of the stock. So there should be no surprises there.

That being said, I generally think it's a good idea to divest of employer stock once you're retired, so I would suggest rolling into your IRA. That's what I've done.
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Topic Author
PoemMan
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Re: 401(k) Stock Fund vs. Company stock price

Post by PoemMan » Tue Jun 11, 2019 5:38 pm

Stinky; to clarify my reasoning for rolling over the funds, I have been intending to do so for a while to allows me more controql and the upcoming merger’s blackout is incentive to make the necessary adjustments. FIDO is the Plan Administrator and they inform me that the new Stock Fund’s price has not been established yet. I agree with post retirement divesture.

Regarding the NUA, some research shows that in fact for me (really us!), a distribution of these Stock funds bears some consideration. The following by Kitces is informative: https://www.kitces.com/blog/net-unreali ... sop-plans/

Thank you all!

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