Provided by Joseph V. Curatolo
The opportunity to acquire company stock — inside or outside a workplace retirement plan — can be a lucrative employee benefit. But having too much of your retirement plan assets or net worth concentrated in your employer’s stock could become a problem if the company or sector hits hard times and the stock price plummets.
Buying shares of any individual stock carries risks specific to that company or industry. A shift in market forces, regulation, technology, competition — even mismanagement, scandals and other unexpected events — could damage the value of the business. Worst case, the stock price may never recover. Adding to this risk, employees who own shares of company stock depend on the same company for their income and benefits.
Time for a concentration checkup?
The possibility of heavy losses from having a large portion of portfolio holdings in one investment, asset class or market segment is known as concentration risk. With company stock, this risk can build up gradually.
An employee’s compensation could include stock options or bonuses paid in company stock. Shares may be offered at a small discount through an employee stock purchase plan, where they are typically purchased through payroll deductions and held in a taxable account. Company stock might also be one of the investment options in the employer’s tax-deferred 401(k) plan, and some employers may match contributions with company stock instead of cash.
Investors who build large positions in company stock may not be paying attention to the concentration level in their portfolios, or they could simply be ignoring the risk, possibly because they are overly optimistic about their employer’s future. Retirement plan participants might choose familiar company stock over more diversified funds because they believe they know more about their employer than about the other investment options.
What can you do to help manage concentration risk?
Look closely at your holdings. What percentage of your total assets does company stock represent? There are no set guidelines, but holding more than 10 to 15 percent of your assets in company stock could upend your retirement plan and your overall financial picture if the stock suddenly declines in value.
If you work for a big company, you may also own shares of diversified mutual funds or exchange-traded funds that hold large positions in your employer’s stock or the stock of companies in the same industry.
Formulate a plan for diversifying your assets. This may involve liquidating company shares systematically or possibly right after they become vested. However, it’s important to consider the rules, restrictions and timeframes for liquidating company stock, as well as any possible tax consequences.
For example, special net unrealized appreciation (NUA) rules may apply if you sell appreciated company stock in a taxable account, but not if you sell stock inside your 401(k) account and reinvest in other plan options, or if you roll the stock over to an IRA. You could miss out on potential tax savings, because future distributions would generally be taxed at higher ordinary income tax rates.
An appropriate allocation of company stock will largely depend on your goals, risk tolerance and time horizon — factors you may want to review with a financial professional. It may also be helpful to seek an impartial assessment of your company’s potential as you weigh additional stock purchases and make decisions about keeping or selling shares you already own.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Joseph V. Curatolo is president of Georgetown Capital Group, 5350 Main St., Williamsville (phone: 633-9800, toll-free 1 (800) 648-8091, fax 633-9789, www.georgetowncapital.com).
Insurance services offered by Georgetown Capital Group, which is independent of Royal Alliance Associates, Inc., with separate ownership, and is not registered as a broker-dealer or investment advisor.
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