Your 401(k) Is Not Safe at Home

Allowing a concentrated position in your company’s stock to build up in a 401(k) is a bad idea

Photo: Christophe Vorlet

Jason Zweig

The Wall Street Journal

Jul 29, 2016 11:05 am ET

Among investors, familiarity doesn’t breed contempt; it breeds comfort. And that can be dangerous.

Consider how employees save for retirement. Your salary already depends on the health of the company you work for. So putting part of your retirement money into your company’s stock is piling risk upon risk. Yet people do it anyway.

Since June, four dozen companies whose stock fell by at least half in 2015 have filed disclosure forms to the Securities and Exchange Commission on their 401(k) and other savings plans. By my estimate, workers at these companies lost $1 billion in 2015 by over-investing in the stock of their own employer.

Consider Kinder Morgan, the energy pipeline and storage company based in Houston. As of the end of 2014, its employees had chosen to put $172 million of their retirement plan into Kinder Morgan’s stock. By the end of 2015, after its stock fell 62.8% for the year, only $69 million remained.

The stock has gained 38% so far in 2016. Since year-end 2014, however, it has lost 48.4%, including dividends, while the S&P 500 is up 9%.

Kinder Morgan caps contributions to its stock at 20% and doesn’t permit exchanges into company stock once it reaches 35% of an employee’s assets. A Kinder Morgan spokeswoman says it is “a positive example of a company that puts limits and diversification requirements in place to protect its employees.”

Alongside a 401(k), some companies offer employee stock-purchase plans in which you may buy shares at a discount of up to 15%. You could, and probably should, resell the shares on the open market and pocket the difference.

But allowing a concentrated position in your company’s stock to build up in a 401(k) is a bad idea.

Even the U.S. Supreme Court — ruling on one of the many lawsuits that have arisen over losses on company stock in savings plans — has held that encouraging employees to own a stake in the company they work for is a laudable goal. But the court also found that retirement plans mustn’t let that goal undermine the “duty of prudence” to maximize employees’ savings and avoid “excessive risk.”

Every investor’s portfolio consists of financial and human capital. Your financial capital is cash, bonds, stocks and the like; your human capital is the income you will earn from your work over your lifetime. The more your financial and human capital overlap, the more vulnerable you are to risks outside your control.

In 2015, home prices in Houston fell by more than 7% in the second half of the year. A worker with most of his retirement money in Kinder Morgan stock could end up with a shriveled nest egg and a house worth less than he paid for it, all at the same time.

Such risks don’t go away because a stock has performed well lately.

At South Jersey Industries, a natural-gas utility based in Folsom, N.J., employees are urged to diversify and may sell their shares at any time.

Over the past two decades, SJI has returned an average of 14% annually, outperforming the S&P 500 by nearly six percentage points.

So 61% of the 401(k) plan remains in SJI’s stock.

That’s down from 91% in 2002. But it was enough to shrink SJI’s total 401(k) assets by one-seventh in 2015, almost entirely because the company’s stock lost 17% in what Marissa Travaline, head of investor relations, calls a “repositioning year.”

SJI’s stock is up 38% in 2016, but over the past five years it still trails the stock market by an average of five percentage points annually. The company expects younger employees to continue allocating less to its own stock, says Ms. Travaline.

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