July 13, 2018 / 11:05 AM / a year ago

RPT-COLUMN-Beyond GE: U.S. workers own too much company stock in retirement plans

 (Repeats July 12 column for wider distribution.)
    By Mark Miller
    CHICAGO, July 12 (Reuters) - The decision marked the end of
an era: last month, the keepers of the Dow Jones Industrial
Average        removed General Electric Co       , one of the
original stocks included in the index when it was created in
    The once-mighty GE had become the sixth-smallest member of
the 30-component Dow by market value and carried the index’s
lowest stock price.
    The move by S&P Dow Jones Indices reflected the decline of
an American industrial icon.              But the company’s
plunging stock highlights a problem that refuses to go away: too
much concentration of employer stock in workplace retirement
    More than one-third of GE 401(k) plan assets were held in
the company’s own shares in 2016, federal filings show.
    Just 15 years ago, GE was the world’s most valuable public
company. But it has struggled in several of its key industrial
markets and suffered losses in the financial services business
during the global financial meltdown of 2008.             
    GE stock has fallen nearly 80 percent from highs in 2000,
serving up a reminder of the risk of holding your employer’s
stock in a retirement account.
    Changes in federal law have encouraged retirement plans to
move away from company stock ownership, and a spate of lawsuits
also have helped convince many plan sponsors to reduce or
eliminate the practice.
    Data from Vanguard points to an encouraging trend. In 2017,
among all account-holders in defined contribution plans
administered by the mutual fund giant, 90 percent had no
investments in their employer’s shares, either because it was
not offered (76 percent) or they chose not to invest in it (14
percent). Five percent had holdings ranging from 1 percent to 20
percent of their plan assets, and 5 percent had concentrated
employee stock positions exceeding 20 percent. The industries
still most likely to offer company stock were agriculture/mining
and construction (13 percent offered), Vanguard data shows. 
    The GE story belies a sharp improvement in diversification
by many 401(k) plans over the past decade. As recently as 2007,
nearly 25 percent of Vanguard-administered plans had employer
stock concentration levels higher than 20 percent.
    The more recent improvement stems in part from the
spectacular 2001 collapse of Enron Corp, which blew away the
life savings of thousands of employees holding the company’s
stock. The ensuing Pension Protection Act of 2006 required
defined contribution plan sponsors to allow participants to
diversify holdings away from employer shares, and to notify them
of their rights in this area. 
    Most experts say employee retirement portfolios should not
hold more than 10 or 15 percent of their employer’s stock.
    "Since Enron, many employers have decided this isn’t a good
thing for employees - that’s the good news,” said Robert Pozen,
a senior lecturer at the MIT Sloan School of Management, who
recently reviewed federal filings of large retirement plans. (brook.gs/2m5dwUv)
    “Unfortunately, quite a few companies have continued to not
only allow this but essentially encourage it, because they make
matching contributions with their own stock as a way to conserve
cash,” he said. (GE employees are not required to take matching
contributions in company stock, a GE spokeswoman said.)
    Pozen has no problem with employee stock ownership outside a
retirement plan, or stock options. But most employees should
hold broadly diversified retirement portfolios, he said.
Morningstar research has found that the stock of companies with
high allocations of their own stock in a 401(k) plan tended to
underperform their peers on a relative performance and
risk-adjusted basis.
    Moreover, Vanguard research shows that concentrated stock
positions tend to displace investments in diversified equity
funds and other balanced funds. Overall equity allocations also
tend to be higher.
    Another problem is exposing workers to the double risk of
potentially losing not only their savings but their jobs. And
the GE story underscores the false sense of comfort that can
arise among employee investors.
    "Companies like GE have done very well over many decades,
but there are very few that do really well over 30 or 40 years,"
 Pozen said.
    I asked GE if it has policies or programs in place
encouraging diversification. Mary Kate Nevin, manager of
financial and executive communications, pointed to language in
an employee benefits handbook warning against the risk of having
any more than 20 percent of retirement savings in any single
company stock, or industry. She also noted that the 401(k)
program held more than 250 education sessions with workers last
year that also included messages about the importance of
    Pozen thinks more will be required. He argues U.S. Congress
should take steps to reduce or eliminate this risk by limiting
holdings of employer stock to 10 percent of plan assets - the
same legal limit that defined benefit plans must follow in their
investment portfolios.
    “You could grandfather existing programs, and tell them that
they can no longer increase the percentage of their own stock in
the plan,” he said. “It wouldn’t be a dramatic thing, and it
would be very positive for plan participants.”  

 (Editing by Matthew Lewis)
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