Does employer stock rock retirement?
September 5, 2014 by Kevin Startt
When asked why he no longer visited a certain St. Louis restaurant, former Yankees Hall-of-Famer and coach Yogi Berra responded, “Nobody goes there anymore. It is too crowded.” This witty saying for employees, who have a bulk of their blood, sweat and tears in their company’s stock for their retirement plan and who are still non-diversified, is not being heeded. Even though there have been a litany of companies who tied their employees’ fortunes to the bottom line and got busted, there remain a bountiful number of great names where more than 70 percent of employees have the majority of their retirement balance in company stock.
Five years into one of the longest bull markets in history, and after Enron, WorldCom, Lehman Brothers and many other Fortune 500 companies showed that an over-concentration of one’s assets can be a recipe for disaster in retirement, employees still flock to their bosses’ bounty. Many companies have created 401(k) plans that are designed for diversification. Sadly, many of these employers included company stock as an option in their (k) plans, and instead of taking advantage of the opportunity to diversify, employees double up on their stock while allocating a minute portion of their other contributions to a handful of mutual funds.
In Yogi’s plan, it’s crowded with company stock in retirement plans despite two ugly bear markets in the last 14 years. Even Warren Buffet’s companies like Burlington Northern are reducing employee stakes in their own firms right now, according to the Wall Street Journal — so why aren’t others?
The extent to which this remains a problem can be exemplified by two personal stories I recount from my past experience with one large and one small plan in the mid-1990s.
One plan, LDDS, the precursor to MCI WorldCom, chose Fidelity International for their plan despite Templeton’s superior international resources and performance back then. Why? Primarily, because, Fidelity at the time could handle company stock, and Templeton could not, despite being a superior manager. As WorldCom grew to over 200,000 employees before going bust, it was apparent very few participants were adding Fidelity funds. It was all about what custodian could handle company stock.
Many times, I hear participants say that because they work for a private company, they are immune to Wall Street. But because they are employees at a company that holds their retirement in their hands, it can be hard to think objectively about it. This happened to a local retail gasoline company, Racetrac Petroleum, in the late 1990s. Employees loaded up company stock because revenues were soaring and the company was the dominant retailer in Georgia, and a private company. Along came one of the fastest-growing, well-run retailers, Quick Trip, combining excellent customer service with deli sandwiches, smoothies and low-priced gasoline. As revenues plummeted, the company had to be remade, and employee retirement stock was crushed. The game was over, as tens of thousands were stuck in company stock.
Through saving in a fixed index annuity, a participant can ideally hedge against “tectonic risk” — the chances that your company could be hurt by new competitors, regulations or technologies that alter the profitability of the business. Even a large ESOP plan, like the private grocery retail company Publix, is only one bad piece of meat away from a massive recall that can affect stock prices temporarily, as Target and Johnson & Johnson found with credit card hacking. Participants can use in-service distribution to access the secure, smart and simple way to access a personal pension, like stream of lifetime income and potential growth. In addition, most employers don’t offer a plan to deal with chronic or terminal illness after retirement as many indexed annuities do. Last plan fiduciaries could mitigate their ERISA risk through allowing indexed annuities.
Yogi also said, “The future ain’t what it used to be.” So it is with those “black swans” that blind participants into doing nothing to reduce risk of company stock and ruining dreams lifetime income goal and peace of mind.