Pros and Cons of Company Stock |
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401(k) Fact |
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Only 11 percent of plans offer company stock, but 59 percent of participants offered company stock invest in it (How America Saves 2011). |
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If company stock is one of your 401(k) plan choices, you’ll be faced with two important decisions: Should you invest? How much of your portfolio should you commit?
There may be good reasons to choose the stock, in addition to any potential financial incentives your employer offers. If you work for a strong company in a strong market sector, you could realize a substantial gain from owning the stock. But there are potentially serious problems.
You can’t ignore the fact that you already depend on your employer for your current income, so you’d be tying your financial security even more tightly to a single source. In the worst possible circumstance you could be out of a job, and that portion of your 401(k) portfolio committed to company stock could be totally worthless. Experts disagree on how much company stock in a 401(k) account is too much, but many prefer a maximum of 10 percent to 15 percent.
You may have less flexibility to change the allocation of your plan assets if some of your money is invested in company stock. But a 2006 federal law requires companies to let employees sell company stock they received as an employer match after holding it for three years. That could result in losses if the share price dropped before the time limit expired. However, some companies may permit you to sell shares received in a match immediately.
For additional information, see our Investor Alert, Putting Too Much Stock in Your Company—A 401(k) Problem.
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