"Filling Your 401k with Company Stock"

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Taylor Larimore
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"Filling Your 401k with Company Stock"

Post by Taylor Larimore » Fri Mar 27, 2015 10:53 am

Bogleheads:

If you own stock in your company's 401k plan, you will want to read this New York Times article:

Filling Your 401k with Company Stock

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Fri Mar 27, 2015 12:00 pm

It is not one size fits all. My 401(K) is 100% company stock; because of a qualified domestic relation order that is only 14% of my portfolio. My generous company match had to all go to company stock and I received a "poison pill" stock option through my 401(K). All of the stock is now fully vested but I let it ride. The stock pays just under 5% a year in dividends and is no RadioShack. The company is not what it was back in the day but if it fails the entire US economy will go with it.

It's in the mad money section of my portfolio with an expense ratio of 0.0186%.

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Re: "Filling Your 401k with Company Stock"

Post by logicon » Fri Mar 27, 2015 12:16 pm

My company doesn't allow company stock to be purchased within my 401(k), even in a self-directed brokerage account.

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Re: "Filling Your 401k with Company Stock"

Post by Boglegrappler » Fri Mar 27, 2015 12:30 pm

Its simply a matter of how much of your eggs are in one basket. If you're dependent on your job for your income, and you have a significant portion of your savings in company stock, you should probably rethink it.
The company is not what it was back in the day but if it fails the entire US economy will go with it.
The first part is obvious based in the yield you note. In today's environment, anything with a yield above maybe 3.5%-ish is unlikely to keep up with gdp growth. Even the highest yielding utilities (read:mature industry, growth at the population rate) only yield just above 4%. If a company stock is yielding 5%, the market is telling you that its in decline. Of course, it matters less when its not all of your "eggs".

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Fri Mar 27, 2015 1:08 pm

Boglegrappler wrote:Its simply a matter of how much of your eggs are in one basket. If you're dependent on your job for your income, and you have a significant portion of your savings in company stock, you should probably rethink it.
If a company stock is yielding 5%, the market is telling you that its in decline.
I'm retired and will never have to rely on investments for income. The company is not what it used to be because of divestiture; it is Verizon, Cramer, of Mad Money, likes it over at&t and it is still part of the DOW.

I agree that 99 and 44/100% should not fill their 401(K) with company stock.

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Re: "Filling Your 401k with Company Stock"

Post by bhsince87 » Fri Mar 27, 2015 1:31 pm

Been there, done that, bought the T-shirt, then had it ripped off my back by corrupt management!

http://en.wikipedia.org/wiki/Dennis_Kozlowski


I had "only" about 30% of my 401k in company stock. But still, I lost big. And I lost my job at the very same time.

I was as much "on the inside" as anyone could have been, short of being one of the few in his inner circle who knew the real deal. And I was a huge Dennis fan. I met him a few times, shook his hand, looked him in the eye, even had dinner with him once. But I was still blindsided when it all went down.

It was very traumatic, but I eventually pulled myself back up and moved on. But it taught me an extreme lesson in the importance of diversification. Never again!
BH87

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Re: "Filling Your 401k with Company Stock"

Post by rob » Fri Mar 27, 2015 1:36 pm

It's the last thing you want in a 401K plan but I worked for company that forced 401K match in company stock... Hated every second of it but once I left it was history :-) Current company has a "fund" in 401K that is company stock (match is in cash) but IMO it should be outlawed - I'm sure there are a lot of people who suck up the company stock :oops: .
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Fri Mar 27, 2015 2:19 pm

rob wrote:t's the last thing you want in a 401K plan but I worked for company that forced 401K match in company stock...
If given a choice if no match or company stock which would you chose? Especially if the match was 66%.

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Re: "Filling Your 401k with Company Stock"

Post by bhsince87 » Fri Mar 27, 2015 2:43 pm

Uncle Pennybags wrote:
rob wrote:t's the last thing you want in a 401K plan but I worked for company that forced 401K match in company stock...
If given a choice if no match or company stock which would you chose? Especially if the match was 66%.
I would absolutely take the match. But diversify out of it ASAP.

And just to be fair and balanced, I had a friend who worked for a small telecom company back in the early 90's. His only 401k investment option was company stock. The company eventually got bought out, and after 5 or 6 years on the job, his 401k was worth about 10X his salary!

Of course, he was one of the lucky ones. His success actually motivated me to try to do the same thing. Silly me...
BH87

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Fri Mar 27, 2015 3:17 pm

bhsince87 wrote: His only 401k investment option was company stock.
That doesn't sound like a good plan forcing one to invest one's own money in company stock. That is quite different that having the company buy their stock for you. I had no idea how bad some of these 401(K) plans are. They are touted as the best investment one can make but that may not always be the case.

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Re: "Filling Your 401k with Company Stock"

Post by amateurnovice » Fri Mar 27, 2015 3:18 pm

ENRON

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Re: "Filling Your 401k with Company Stock"

Post by victorb » Fri Mar 27, 2015 8:51 pm

I think you should be very careful on how much goes into company stock.
However, there is a big difference between Enron and a company like 3M.

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Re: "Filling Your 401k with Company Stock"

Post by Saluki31 » Fri Mar 27, 2015 9:51 pm

Being heavily invested in company stock resulted in me losing only 1.9% in my 401k in 2008. I realize I was lucky, and have no longer held company stock since 2009.

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Re: "Filling Your 401k with Company Stock"

Post by FinancialDave » Fri Mar 27, 2015 11:09 pm

victorb wrote:I think you should be very careful on how much goes into company stock.
However, there is a big difference between Enron and a company like 3M.
What about Kodak, or many other companies that have been in the DOW over the last hundred years and are now gone?

fd
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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Fri Mar 27, 2015 11:20 pm

FinancialDave wrote:
victorb wrote:I think you should be very careful on how much goes into company stock.
However, there is a big difference between Enron and a company like 3M.
What about Kodak, or many other companies that have been in the DOW over the last hundred years and are now gone?
Most were merged or acquired, very few went the way of Enron. No one is saying a 401(K) in 100% company stock is OK. If I wanted the 66% company match I had to take it in company stock. I had to hold it for 3 years before it became vested then I could move it to another investment. If the stock is sound what's wrong with having it make up 10% of the holdings? Company stock has the lowest expensise ratio of any other investment; at least it should.

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Re: "Filling Your 401k with Company Stock"

Post by FinancialDave » Fri Mar 27, 2015 11:59 pm

I was just saying IMHO there is no difference between Enron and ANY other company, at the time. Hindsight is always 20/20, but just about everyone, even those inside Enron were totally fooled until it was too late.

My philosophy from the first day I ever invested in a stock has always been that any company can go out of business (or so far down that it really doesn't matter) and if you can't take that in the realm of what you invest in, then you shouldn't be investing in individual stocks - which most Bogleheads believe anyway. There are occasionally "black swans" that just blind-side a company and no one really sees it coming. It just falls in the realm of you "can't predict the future."

fd
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Re: "Filling Your 401k with Company Stock"

Post by victorb » Sat Mar 28, 2015 12:45 am

I think there is a big difference in companies. Some companies are very diversified and have a lot of value to other companies, if they were broken apart into separate business units. Kodak had a long slide down, not suddenly like Enron.
I do agree that having too much in your company is not a good idea. All companies are not on the precipice like Enron, WorldCom, etc.

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Re: "Filling Your 401k with Company Stock"

Post by sawhorse » Sat Mar 28, 2015 5:52 am

For companies that encourage employees to tilt their accounts towards company stock, how good are the other options in the plan? It seems to me that an employer could manipulate the situation by having mega-crappy alternatives.

I'm disappointed that the article didn't mention the fact that some companies forbid employees from switching out of the matching portion until X number of years or X age.

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Sat Mar 28, 2015 8:33 am

FinancialDave wrote:My philosophy from the first day I ever invested in a stock has always been that any company can go out of business (or so far down that it really doesn't matter) and if you can't take that in the realm of what you invest in, then you shouldn't be investing in individual stocks - which most Bogleheads believe anyway
Bogleheads are permitted to invest 5% in Unicorn ranches if they please. I have 14% of my total portfolio in company stock for many sound reasons and I'm keeping it.
victorb wrote:All companies are not on the precipice like Enron, WorldCom, etc.
MCI/WorldCom was purchased by Verizon. So I now hold MCI in my 401(K).

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Re: "Filling Your 401k with Company Stock"

Post by MN-Investor » Sat Mar 28, 2015 2:15 pm

The younger posters here might not remember the days of the '80s - hostile takeovers, levered buyouts, etc. In an effort to make their companies less attractive for such actions, companies started encouraging their employees to own stock in their companies. ESOPs (Employee Stock Ownership Plans) became real popular during this time period. The common wisdom was that employees would feel a pride in and commitment to a company in which they held stock. Many ESOPs were rolled over into 401(k)s as they grew in popularity. But the push to own company stock continued.

If I remember correctly, my company (I left in '99) either suggested or mandated that you start reducing your company stock holdings once you hit 60.
The key to success - Save early, save often, invest well.

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Re: "Filling Your 401k with Company Stock"

Post by Uncle Pennybags » Sat Mar 28, 2015 5:19 pm

MN-Investor wrote:The younger posters here might not remember the days of the '80s - hostile takeovers, levered buyouts, etc. In an effort to make their companies less attractive for such actions, companies started encouraging their employees to own stock in their companies.
I still have the LESOP in my 401(K) the company started that when the barbarians were pounding at the gate. If I invest that in something else I can't go back to that security and lose a tax advantage.

When I have to withdraw funds from the 401(K) I can differ paying tax on the capital gain portion if I keep it in stock. The gain is more than half the value; taxes make investing difficult.

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Re: "Filling Your 401k with Company Stock"

Post by jrbdmb » Thu Sep 15, 2016 5:10 pm

sawhorse wrote:For companies that encourage employees to tilt their accounts towards company stock, how good are the other options in the plan? It seems to me that an employer could manipulate the situation by having mega-crappy alternatives.

I'm disappointed that the article didn't mention the fact that some companies forbid employees from switching out of the matching portion until X number of years or X age.
A previous employer matched only in company stock and prohibited from switching any funds out of that prior to age 55.

After Enron they modified their plan - still matched in company stock but had no restrictions on selling it.

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Re: "Filling Your 401k with Company Stock"

Post by KATNYC » Fri Jun 30, 2017 4:26 pm

At a team meeting this week a colleague said he has 70% of his 401k in company stock. The stock has done well in the last few years, up 100%
We were shocked. He thinks that being an employee will give him the inside track if things go south, so he'll have time to sell.

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Re: "Filling Your 401k with Company Stock"

Post by GAAP » Fri Jun 30, 2017 4:58 pm

I did this once -- when the stock dropped precipitously. Yes, this was market timing, but I was young, stupid, and a believer. I got lucky -- especially considering they went bankrupt a few years later.

My current employer has traditionally made matching contributions in stock, and allowed us to change half of that to something else (manually) -- all of it after age 55. I had to go in every month to change it. They finally changed this year to allow us to actually choose how those funds were invested.

Enron must be too far in the past, people seem to forget rather quickly...

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Re: "Filling Your 401k with Company Stock"

Post by LadyGeek » Fri Jun 30, 2017 8:22 pm

KATNYC wrote:At a team meeting this week a colleague said he has 70% of his 401k in company stock. The stock has done well in the last few years, up 100%
We were shocked. He thinks that being an employee will give him the inside track if things go south, so he'll have time to sell.
Tell him to think again. Insider trader, i.e. trading on nonpublic information, is prohibited. Check your company guidelines.

The SEC has a good explanation: SEC.gov | Insider Trading
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Re: "Filling Your 401k with Company Stock"

Post by tomd37 » Fri Jun 30, 2017 8:41 pm

How well I remember Northern Telecom Inc. (aka Nortel Networks) in just a few years going from $88.00+ to $0.43 per share before declaring bankruptcy. I knew a couple of co-workers who were totally invested in Nortel and went broke. :(
Tom D.

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Re: "Filling Your 401k with Company Stock"

Post by FinancialDave » Fri Jun 30, 2017 11:19 pm

Ya,
Not a good idea because when that happens (company goes broke) you usually lose your job too! Double whammy!
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Re: "Filling Your 401k with Company Stock"

Post by jimb_fromATL » Fri Jun 30, 2017 11:37 pm

I still remember talking to an older new car salesman back in the mid 2000s who had been a middle or higher level manager at Lucent, which was a spin-off of AT&T. Lucent was the former Western Electric ... the hardware and supply arm of the blue chip company ... which nobody thought could fail.

Just before he retired he had something in the range of $700,000 in company stock in his 401(k) and ESOP plans. That was more than enough back then to make him very comfortable in retirement in combination with his pension and Social Security.

Unfortunately, like a lot of other companies that were too big to fail, Lucent had some problems, and as I recall his $700K had dropped in value to something like $8K to $10K.

... And that was why he was selling cars when he was past normal retirement age when he had originally expected to be really retired.

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Re: "Filling Your 401k with Company Stock"

Post by KATNYC » Sat Jul 01, 2017 11:18 am

LadyGeek wrote:
KATNYC wrote:At a team meeting this week a colleague said he has 70% of his 401k in company stock. The stock has done well in the last few years, up 100%
We were shocked. He thinks that being an employee will give him the inside track if things go south, so he'll have time to sell.
Tell him to think again. Insider trader, i.e. trading on nonpublic information, is prohibited. Check your company guidelines.

The SEC has a good explanation: SEC.gov | Insider Trading
We told him to think again. He certainly doesn't view his plan as insider trading.

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Re: "Filling Your 401k with Company Stock"

Post by LadyGeek » Sat Jul 01, 2017 12:31 pm

^^^ If it's a large employer, you should receive compliance training on insider trading. Additionally, employers are most probably monitoring for this type of activity. Your coworker has been informed, that's the best you can do.

My prior MegaEmployer matched my 401(k) contributions with company stock. Every few weeks, I sold my fractional share to purchase funds in accordance with my asset allocation percentages for that account.

You are compensated in dollars, not shares. If the share price goes up, you'll get less shares as matching compensation.

The bet is that the stock will go up faster than then your invested funds. I'm not taking that bet.
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Re: "Filling Your 401k with Company Stock"

Post by GAAP » Sat Jul 01, 2017 1:08 pm

tomd37 wrote:How well I remember Northern Telecom Inc. (aka Nortel Networks) in just a few years going from $88.00+ to $0.43 per share before declaring bankruptcy. I knew a couple of co-workers who were totally invested in Nortel and went broke. :(
Northern Telecom is exactly where I did it -- buying in the dip before that high point, and selling near the peak. I'm really glad I didn't reverse those points...

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Re: "Filling Your 401k with Company Stock"

Post by GAAP » Sat Jul 01, 2017 1:10 pm

Think of this as another form of diversification. Your personal capital is already invested in your employer, don't invest your financial capital there also.

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Re: "Filling Your 401k with Company Stock"

Post by jimb_fromATL » Sat Jul 01, 2017 1:12 pm

GAAP wrote:
tomd37 wrote:How well I remember Northern Telecom Inc. (aka Nortel Networks) in just a few years going from $88.00+ to $0.43 per share before declaring bankruptcy. I knew a couple of co-workers who were totally invested in Nortel and went broke. :(
Northern Telecom is exactly where I did it -- buying in the dip before that high point, and selling near the peak. I'm really glad I didn't reverse those points...
So ... did you do it by being smarter than virtually everybody else; with knowledge from insider trading; or with a working crystal ball; or just plain luck ?

jimb

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Re: "Filling Your 401k with Company Stock"

Post by GAAP » Sat Jul 01, 2017 1:21 pm

jimb_fromATL wrote:
GAAP wrote:
tomd37 wrote:How well I remember Northern Telecom Inc. (aka Nortel Networks) in just a few years going from $88.00+ to $0.43 per share before declaring bankruptcy. I knew a couple of co-workers who were totally invested in Nortel and went broke. :(
Northern Telecom is exactly where I did it -- buying in the dip before that high point, and selling near the peak. I'm really glad I didn't reverse those points...
So ... did you do it by being smarter than virtually everybody else; with knowledge from insider trading; or with a working crystal ball; or just plain luck ?

jimb
Luck, belief in the company, stupidity -- not necessarily in that order...

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Re: "Filling Your 401k with Company Stock"

Post by nedsaid » Sat Jul 01, 2017 1:27 pm

The bottom line of all of this is that an investor should not take concentrated risks. Working for a company and then having a substantial amount of your net work in their stock is concentrated risk on steroids. Think of the Enron, Washington Mutual, and now Radio Shack employees who lost not only their jobs but a substantial part of their retirement too.
A fool and his money are good for business.

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Re: "Filling Your 401k with Company Stock"

Post by davegreen10 » Sat Jul 01, 2017 2:56 pm

My company (Fortune 300) pays half the match (3.5%) in company stock. At orientation a coworker asked if they can elect higher. They were told no; the company doesn't want you over allocated in that direction and feel free to purchase on your own outside the company plan.

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Re: "Filling Your 401k with Company Stock"

Post by Yohanson » Sat Jul 01, 2017 8:38 pm

I've recently had as much as 48% of my 401K in company stock. Right now it's 31%. I know other people that have as much as 95% in company stock at my Fortune 100 corp. It's beaten the S&P 500 since 2001 and still going strong. It's a diversified industrial conglomerate that wants to be the leader in industrial software and IOT.

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Re: "Filling Your 401k with Company Stock"

Post by KNMLHD » Sun Jul 02, 2017 8:47 am

I left my former employer (Nortel) back in '99... at that time, a Fortune 100 company that was riding the internet wave/boom...

Fast forward a few years, the wheels were coming off the bus... at one point, I know of several friends that shifted large portions of their 401K into Nortel stock after it had hit 50 cents, soon heading towards $8... for a brief # of months, they saw huge returns... that eventually was wiped out when the company went bankrupt. These were folks who had built a 401k over the past 25-30 years...

Job... gone
Retirement nest egg... in some situations... all gone
Plans of early retirement... long gone
Last edited by KNMLHD on Sun Jul 02, 2017 11:44 am, edited 1 time in total.

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Re: "Filling Your 401k with Company Stock"

Post by Top99% » Sun Jul 02, 2017 9:52 am

djdube525 wrote:I left my former employer (Nortel) back in '99... at that time, a Fortune 100 company that was riding the internet wave/boom...

Fast forward a few years, the wheels were coming off the bus... at one point, I know of several friends that shifted large portions of their 401K into Nortel stock after it had hit 50 cents, and was headed towards $8... for a brief # of months, they saw huge returns... that eventually was wiped out when the company went bankrupt. These were folks who had built a 401k over the past 25-30 years...

Job... gone
Retirement nest egg... in some situations... all gone
Plans of early retirement... long gone
I worked at Nortel too and know many co-workers who were terribly impacted by the double hit of unemployment and a loss of much or all of their nest egg. Nortel seemed like the unsinkable ship for a long time but became a textbook example of why not to keep all your eggs in one basket. I do buy some of my present employer's stock because they offer it at a discount but I sell when my holdings reach >2% of our assets.
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Re: "Filling Your 401k with Company Stock"

Post by Taylor Larimore » Sun Jul 02, 2017 10:45 am

I do buy some of my present employer's stock because they offer it at a discount but I sell when my holdings reach >2% of our assets.
Top99%:

Assuming you buy for your taxable account, it would probably be better to sell immediately after holding for 12 months to lessen the capital-gain tax (if any) when you eventually sell. Put the proceeds in a broad market tax-efficient index fund.

Best wishes.
Taylor
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Re: "Filling Your 401k with Company Stock"

Post by KATNYC » Mon Jul 31, 2017 5:21 pm

Another colleague, higher level with stock options, mentioned having 80% of 401K in company stock.
Reducing it slightly due to a family member/broker suggesting it was too much. :shock:

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Re: "Filling Your 401k with Company Stock"

Post by nolesrule » Mon Jul 31, 2017 7:03 pm

My wife receives her much in a Company Stock fund. Right now the match makes up about 11% of all of the money that goes into our investments annually.

It's a MegaCorp in the S&P 500, so I count it as part of the US stock in our overall asset allocation, but also have a separate rebalance band centered around 5% of our portfolio. When it gets toward the upper rebalance threshold, I reallocate toward whatever is low per our asset allocation.We do not reallocate back into the company stock.

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