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401(k) Tip |
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When you invest in your company's stock, you may get...- Better 401(k) matching
- An increase in your 401(k) cap
- Low prices on stock
- Tax advantages
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Should you invest your 401(k) plan contributions in stock issued by the company you work for? That question generates intensive debate, in part because recent events demonstrate the risk of depending too heavily on any single company for your financial security. But your employer may offer incentives that are hard to refuse.
If you work for a publicly traded corporation, your 401(k) investment menu may include company stock or a fund that buys only your company’s stock.
You may find that your employer encourages you to make this choice. For example, you may be able to buy the stock for less than the current market price. You may be able to contribute a higher percentage of your salary if you’re buying the stock. Or your employer may match a higher percentage of your contribution if it goes into the stock.
Your employer may also choose to make any matching contributions in stock rather than in cash. In that case, your account is credited with shares of stock or shares in a company stock fund no matter how you invest your personal contributions. There are financial advantages for your employer in making matching contributions in stock, in part because the company doesn’t have to lay out cash—though all of its matching contributions are tax deductible.
Whether or not it’s ultimately good for you is the real question.
Offering company stock as an investment choice gives employees the incentive of partial ownership in order to strengthen their commitment to the company. It also provides a way to let employees share in the profits if the company prospers.
But if employees have the bulk of their 401(k) money in company stock, their long-term financial security is at much greater risk than if they had built a diversified portfolio.
| Learning from History? The fall of Enron Corporation focused attention on the potentially devastating effect of owning too much company stock. 57.73% of employees’ 401(k) assets were invested in Enron stock as it fell 98.8% in value during 2001. But employees at many companies still have even larger percentages of their 401(k) assets in company stock than Enron employees did. |
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