The Dangers of Investing in Your Company Stock

BP's stock is tanking, and its employees' retirement savings are being dragged down with it, victims of a failure to learn from past corporate implosions. The BP Employee Savings Plan had $2.5 billion invested in BP stock at the end of 2009, nearly 30 percent of its total assets. Since the Deepwater Horizon explosion of April 20, which killed 11 workers and sent tar balls onto the beaches of every Gulf state, the stock's value has declined by more than 50 percent.

Employees may buy shares out of loyalty or optimism, but the BP case provides a reminder of the dangers of allocating too much to company stock. Several law firms and a handful of individual investors are suing over the impact BP's woes have wrought on their retirement plans.

The BP lawsuits call to mind retirement disasters brought on by the scandal-fueled demises of Enron and WorldCom. About 57 percent of Enron's 11,000 workers had a portion of their retirement savings invested in its stock when it lost 99 percent of its value in 2001. The workers lost more than $1 billion in a little more than a month. WorldCom employees lost a similar amount just as fast, after the telecommunications company declared bankruptcy following accounting scandals.

But it didn't take long for those lessons of 2001 and 2002 to be lost. The agricultural giant, Monsanto's, direct-contribution retirement plan now counts the company's own stock as its top investment, holding at 50 percent of total assets, according to BrightScope, a provider of 401(k) ratings, while the Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan, with $14.3 billion in plan assets, holds 93 percent of its portfolio in the company’s common stock.

A 2004 survey by the Employee Benefits Research Institute found that 11 percent of the employees it surveyed had more than 80 percent of their 401(k) allocated to their company's stock. And, according to Hewitt Associates, company stock accounted for 19 percent of 401(k) assets last year. The percentage of employees who held half or more of their 401(k) plan assets in their employer's stock rose to 13 percent in 2009 from 9.4 percent a year earlier.

Most experts think that's too much. Hewitt Associates promotes a 10 percent limit. Others lean toward the more conservative approach adopted by many pension plans and a 2 percent cap.

Individual circumstances and needs should be part of the evaluation.  If a 401(k) is only part of an overall portfolio, a higher percentage of an employer's stock may still be acceptable risk, especially if shares have performed well and the transactions are free of commissions and management fees.

But there are no companies too big to flounder, and tying money up with an employer runs the risk of a double whammy—losing both a job and the value of the retirement savings it provided. At companies using their own stock for matching contributions, workers should still try to avoid having a sizable percentage of their asset allocation tied up in that that stock. Advisers say they should sell those shares frequently and move the money into other funds, although this may depend on whether the company and plan have restrictions on when and how shares can be sold.

By Joe Mont