401(k) Participants Shun Company Stock

There's no end in sight to this 11-year free fall.

The share of 401(k) assets allocated to company stock fell in 2009 for the 11th consecutive year, according to a new study by the Employee Benefits Research Institute (EBRI).

That share was 9% of total assets in all plans, including those that didn’t offer the plan sponsor’s stock as an investment option. It was down a point from 2008 and a full 10 points lower than in 1999. No other category of plan investment declined for even a third straight year. And among plan participants hired within the past two years by employers that did offer company stock as an investment option, just 35.5% selected it, down from 61% a decade earlier.

Driving the trend, in part, is that employees have grown much more aware of the need to diversify investments, likely influenced by such corporate flameouts as Enron and WorldCom, says EBRI research director Jack VanDerhei.

Companies, too, want to see diversification, but not only because it’s best for participants. A common motivation is to reduce legal liability, notes David Wray, president of the Profit Sharing/401k Council of America. He points to a slew of lawsuits by plan participants claiming their employer should have known its share price was going to fall and therefore taken steps to reduce the amount of stock available through the plan. “This downward trend will surely continue for at least several more years,” says Wray.

Many companies that once awarded matching contributions in the form of company stock now let employees choose where to invest the matches. Other strategies include limiting the amount that can be invested in the company, as well as providing participants with the option to turn over their account management to outside advisers, who typically will decrease large holdings in company stock.

How much company stock a participant invests in is partly a function of age. At companies that allow such investment, employees in their 20s allocate 12% of their account balances to it, compared with about 20% for those in their 50s and 60s.

In EBRI’s database of almost 52,000 plans, 46% of participants were in plans that permitted investment in company stock. Almost half of those participants didn’t hold any company stock, though. At the other end of the spectrum, 5% of those participants had more than 80% of their account balances invested in company stock.

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