Financial Focus: Be Cautious About Funding 401(k) With Company Stock

Financial Focus
Be Cautious About Funding 401(k) With Company Stock

If you like the company you work for, show your loyalty by doing the best job you can and taking part in work-related volunteer activities. However, when it comes to meeting your retirement goals, you'll want to invest with your head, not your heart--and that means thinking long and hard about funding your 401(k) with company stock.
Why? Because company stock, like other stocks, will rise and fall in value. If you've jammed your 401(k) full of company stock, you could be taking on an increased level of risk.
And in the past few years, we have seen some high-profile "401(k) meltdowns" that, in an astonishingly short period of time, dissolved a great deal of wealth belonging to employees who put their faith in company stock. For example, about 58% of employees' 401(k) assets were invested in Enron stock when it lost almost all of its value during 2001.
Unfortunately, many 401(k) participants still believe that "it can't happen to me." An estimated 17% of all 401(k) participants have 50% or more of their account in company stock--pretty much the same figure as in the pre-Enron days, according to the Profit Sharing/401(k) Council. And
16% of all 401(k) plan assets were held in company stock at the end of 2003, according to the Investment Company Institute.
How Much Is "Too Much"? Many financial experts recommend investing no more than 10% of 401(k) plan assets into company stock--but this figure is just a guideline. When considering how much company stock to put in your 401(k), look at these factors:
* Size, strength and history of company- If you work for a big, established company with a long track record of profitability, you might feel justified in adding a higher percentage of company stock into your plan than you would if you worked for a small start-up firm.
* Stage of your career- When you're just starting out in your career, you've got many years to overcome the "down" periods of some of the more volatile investments in your 401(k). But when you're nearing retirement, you may want to try to protect any gains you've achieved--and cut back on your risk level--so you can potentially increase the money available to you when you begin taking withdrawals. Consequently, in your final years of contributing to your 401(k), you might consider lowering the percentage of company stock in your plan.
The "Match" Game: Your employer may offer shares of company stock as a 401(k) matching contribution. If so, consider putting in as much as necessary to earn the match. But once you've received it, see if it's possible to "trade in" the company shares for other investments within your 401(k). An increasing number of companies now allow this type of exchange.
Diversify, Diversify, Diversify: Ultimately, you'll want to build a diversified 401(k) portfolio. Choose the mix of stocks, bonds, government securities and other vehicles that fits your risk tolerance, time horizon and long-term goals. To get the appropriate asset allocation, you may want to consult with a financial professional
Take action soon. Your 401(k) can be a great way to save for retirement--if you use it wisely.

This article was submitted by local financial representatives of Edward Jones.