No Guarantees With Your 401k
The other day I had an opportunity to have a conversation with a gentleman that had worked for a well-known company and suffered a substantial loss in his 401k, resulting in a much more tight budget when he accepted the early retirement package rather than be laid off.
What was one of his biggest mistakes?
As you might expect, one of the biggest mistakes was the asset allocation within his plan as he held a substantial percentage in company stock.
When the company stock began to decline, he was guilty of believing that the stock could not go much lower and would make a nice rebound. At that time he actually put even more money into the company stock, that is how sure he was that the company stock would return to previous highs.
Unfortunately, that day has never come and the stock price continued to go down and down. With the declining stock price this man also saw the nest-egg that he had worked so hard to build disappearing before his eyes. To make matters worse, as a result of the drastic decline in stock prices the company was struggling and was conducting round after round of layoffs and eventually his number was called.
As we talked about his experiences, I was surprised to hear him say that he thought 401k plans should offer some sort of protection against losing the money that you have invested in the plan.
In the world of investing, there are very few guarantees and everything comes with some degree of risk. Looking at this man’s situation, it would appear that he was quite concerned with risking his money yet he had almost everything invested in one of the riskiest choices within a 401k plan – company stock.
With my own 401k plan, I invest a very small percentage in my company’s stock but by no means will I let that become a substantial percentage of my portfolio. Over the years and the different companies that I have been with, this is the first time I have invested in the company stock as I am very well aware of the risks involved.
As you examine your own asset allocation or begin investing in your company’s 401k for the first time, please be sure to understand how risky it can be to invest in the company stock. Even more important than that, remember that there are no guarantees with the money you invest into your 401k plan.
I think there should be a law saying that one company’s stock can not be more than 1% of the assets of a 401K. Problem solved. 🙂
That might not be a bad idea. 🙂
I’m sure there are quite a few people that don’t know what to invest in and throw everything into company stock.
I think that any company that offers their employees company stock options in their 401k should atleast be willing to offer training to them so that they can analyze stocks so that they know when they need to dump it. A simple understanding of moving averages, stochastics, and MACD would be sufficient. Good quality post by the way.
Thanks Bunk! I’m a fan of the moving averages, stochastics and MACD myself and agree that understanding the basics can really help.
Since most companies do not provide that education, it is imperative that people take the initiative to learn on their own. Unfortunately not too many people do.
Yes, company stock can be very hazardous to your 401k health. That happened to me once, but I was lucky because I just started out back then and learned my lesson early.
Many companies provide their matching contribution to your 401k withdrawals in the form of company stock. Some others even require that a part of your contribution be company stock. Usually they have a requirement that you must hold the stock for a period of time before you can move it to a different option within your portfolio. If you are an active investor and watch your portfolio regularly you might be able to avoid a disaster scenario. But if you are a casual investor that has no idea what is going on with your 401k, a volatile market can be very treacherous if your company stock is weak.
In light of the recent financial crisis – it is a shame 401Ks are not protected in some way. Those who work for the federal, state or local governments or for the public school systems have a pension that is guaranteed. And I bet the value of those pensions have declined – yet the retirees still get their full amount! How is it that they still get their full monthly benefit? The money has to be coming from somewhere! The Pension Benefit Guaranty Corp.! When they run out of money – I forsee a bail out – paid for out tax dollars! We suffer our own 401Ks demise, plus pay for someone else to get their pension!