Pros and Cons of Company Stock |
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401(k) Fact |
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30% of 401(k) plan assets at companies with over 5,000 employees are in company stock. |
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If company stock is one of your 401(k) plan choices, you’ll be faced with two important decisions: Should you invest? How much of your portfolio should you commit?
There may be good reasons to choose the stock, in addition to any potential financial incentives your employer offers. If you work for a strong company in a strong market sector, you could realize a substantial gain from owning the stock. But there are potentially serious problems.
You can’t ignore the fact that you already depend on your employer for your current income, so you’d be tying your financial security even more tightly to a single source. In the worst possible circumstance you could be out of a job, and that portion of your 401(k) portfolio committed to company stock could be totally worthless. Experts disagree on how much company stock in a 401(k) account is too much, but many prefer a maximum of 10% to 20%.
You may also have less flexibility to change your mind if your 401(k) money is invested in your company’s stock. For example, your employer may restrict your right to sell shares before you turn 50 or for some specific period of time. That could be a problem if the stock price began to slide, and you were unable to prevent major losses. For additional information, see our Investor Alert, Putting Too Much Stock in Your Company—A 401(k) Problem.
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