I wrote this article on February 16th, 2012 for my Golden Valley Patch Blog.
Just about every Minnesota company 401(k) retirement plan menu I have ever seen includes an option to own the common stock of that company in an individual company retirement plan account.
Company retirement plan sponsors clearly want employees to own as much company stock as possible in their individual company retirement plan accounts. Offering company stock to company retirement plan participants is completely legal, and it gives the company the opportunity to have as much of its outstanding stock in “friendly hands” as possible.
In addition, owning company stock in a company retirement plan account is many times promoted as a good “long-term” investment strategy for retirement plan participants. The promotion of this strategy does not make company stock a great retirement plan investment idea.
Over the years, I heard this same nugget of investment wisdom credited to both Peter Lynch and Warren Buffet. The wisdom states that, “The stock does not know you own it.”
Which one of these legendary investors gets the credit for this quotation is much less important than the fact that the wisdom also applies to owning company stock in a company 401(k) retirement plan account.
The company stock you own in your company retirement plan account does not know you work at that company. The company stock can’t have the same emotions and feelings toward you as you may have for the company you work for. Said another way, the company stock can’t love you back!
The reality is that company stock is in no way immune to the recent difficulties of both the U.S. and worldwide economic cycles.
Ownership of company stock in a company 401(k) retirement plan account is too much of an “all your eggs in one basket” investment management approach for the majority of individual company retirement plan participants.
To have your career, your economic livelihood, and your individual retirement savings tied to the fortunes of a single stock falls into the category of highly aggressive investment strategies under any definition.
The investment management of individual stocks in a company retirement plan account is aggressive on its own merits. The fact that you would choose to own a large percentage of your company retirement plan account in a single common stock makes that retirement plan investment strategy even more speculative.
There certainly have been brief time periods where the investment performance of company stock has been rewarding. But if you look back in each of those time periods, the overall stock market was rising at the same time. Individual company retirement plan participants would have had a positive investment returning owning any option on their company retirement plan menu at the same time that their company stock was also going up in value.
If you choose to own your company stock in your individual company 401(k) retirement plan account, you have to be able to manage economic, industry, stock market and company news risk at the same time.
All those risks are a lot to manage for most individual company 401(k) retirement plan participants. I know that I would never attempt it in my company retirement plan account.
Ric Lager
Lager & Company, Inc.
