A version of this article appeared in September Company retirement plans have changed significantly over the past few decades, with a few trends coming on strong. Roth accounts have also shot up in popularity. Yet even as automatic and Roth features have grown more popular, another trend is clearly on the wane: company stock on the k -plan menu. Why the demise?
Well-publicized employee stock-ownership debacles like Enron and Lehman Brothers have surely contributed to the diminished presence of company stock on k -plan menus. In an effort to avoid such issues, plan sponsors have taken steps to reduce their liability in case the stock runs aground. Why Avoid It The drop in popularity of employer stock in k s--both on plan menus and in the percentage of employees who invest in it--is a positive development for one major reason: risk. At the portfolio level, heavily weighting single stock--any stock--has the potential to make that portfolio more volatile than one that's more diffuse.
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Moreover, because company stock ownership is much heavier among larger-cap stocks than smaller ones, it's much more likely that the investor who owns a heavy stake in the company also owns additional shares in that same company through any mutual funds in the portfolio. And then there are human-capital considerations: Employees who invest heavily in company stock have both their human capital and financial capital riding on the fortunes of a single company; difficulties at their employer could cause their stock shares to sink at the same time they suffer job loss or an income reduction.
Of course, employees might like to own company stock because they believe they have an information advantage over other market participants.
Is It Ever a Good Idea to Hold Company Stock in a 401(k)?
Although one might expect that workers who own shares of their employers' stock would benefit from their knowledge of the company, Morningstar Investment Management's head of retirement research, David Blanchett, found the opposite: Companies whose employees have high aggregate allocations to company stock have tended to underperform those without, even when controlling for market capitalization, investment style, sector, and other factors.
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Employee Stock Ownership in 401(k) Plans – History, Pros & Cons
Search Search:. Kailey Hagen. What is a k Plan? Benefits of a k Placing your savings in a k confers many advantages. Here are some of the most important ones: Tax savings: Contributions to traditional k s are made with pre-tax dollars, which reduces your taxable income for the current year. The contributions are tax-deferred, which means that you instead owe taxes when you withdraw funds in retirement. If you are in a higher tax bracket today than you expect to be in retirement, then deferring the tax liability can save you money.
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High contribution limits: k contribution limits are much higher than contribution limits for Individual Retirement Account IRAs. Employer match: Employers often match a percentage of their employees' contributions. This is like getting a bonus and reduces how much you need to save for retirement on your own. Automatic contributions: You can elect to defer a percentage of each paycheck to your k , so that you don't have to make retirement contributions manually.
You can also change your contribution percentage at any time.
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Rollovers: If you leave your employer, you may keep your retirement savings in your old k or roll over the funds into your new company's k or an IRA. Image Source: Getty Images. What are k limits?
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Required minimum distributions Required minimum distributions RMDs are mandatory distributions from k s that must begin when you turn Different types of k s While the traditional k s is most common, there are a few other kinds of k s:. Roth k This is much the same as a traditional k , except that contributions are made with after-tax dollars. Contributions to Roth k s don't reduce your taxable income for the current year, but rather are distributed tax-free in retirement. Solo k A solo k is available only to self-employed people.
This type of k effectively has higher annual contribution limits because you can contribute as both employee and employer. Retirement Plans Check out other retirement plans that may be right for you. Retirement Strategies There's more than one way to get to your retirement goal. IRAs Learn the basics of individual retirement accounts.