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By Christine Benz | 09-13-2012 02:30 PM

Careful With That Company Stock

Although there are some instances when it could pay off, holding too much employer stock is a bad idea, says Morningstar's David Blanchett.

Christine Benz: Hi. I'm Christine Benz for Morningstar.com. Employer stock is a common component of many employee-compensation plans, but holding too much in company stocks isn't often a very good idea. Joining me to discuss the role of company stocks in financial plans is David Blanchett. He is head of retirement research for Morningstar Investment Management.

David, thank you so much for being here.

David Blanchett: Thank you for having me.

Benz: So, David, first let's take a look at the trends that we've observed in terms of employer stock in employees' compensation plans. I know there was a big spike in the 1990s. Everybody had to have company stock. What have the trends been since then?

Blanchett: Well, the good news is that employees are holding less of their employer stock in their 401(k) plans. You have seen a dramatic decrease in employees that are buying it. Employers aren't even offering it. You have seen a lot of employers now have stopped offering their stock to employees in the year 401(k) plans. So there's been a definite positive trend in terms of helping employees make better decisions with their 401(k) monies.

Benz: So what has been driving it down? There were obviously some high-profile blow-ups, Enron and so forth. Has it been just sort of a trend due to some of those bad experiences?

Blanchett: I think a lot of plan sponsors are scared. It's their decision to include it in the 401(k) plan. And so, if you have participants who go out and buy the stock in the 401(k) plan, unless you qualify for certain types of relief, it's like the plan sponsor had. So, if I am a plan sponsor, I don't want to kind of have that risk in my 401(k) of all my participants are buying the company stock and then it performing poorly. This is because you kind of have two bad things happening: The first you have a lot of employees who have lost a lot of money and then you have also probably the bad business with having the bad turn to your stock.

Benz: So let's discuss the key disadvantages to having too much in company stock. Obviously, you could be underdiversified, so you could have a lot of eggs in that one basket. Let's discuss the other considerations there that would work against having employer stock be a big part of your plan?

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