I work for a publicly listed company and I’ve been there for about 20 years. The great bulk of my retirement savings is in my 401(k) Plan. Typically, I keep about 50 percent of my money invested in company stock. The other 50 percent I have spread out in other funds. I have been putting the max into the 401(k) Plan; however, I wonder if I should continue to do so. The company has just stopped its matching program. My questions to you are 1) do you think that it still makes sense to invest in the 401(k) Plan even though the company is not matching and, 2) I am thinking about lowering the percentage of my company stock from 50 percent to 25 percent; what do you think?
I have always been a believer that if you have the opportunity to use a salary deferral program such as 401(k) or a 403(b) Plan, it makes sense to invest the maximum, whether the company is matching or not. When a company matches, it is a no brainer; you have to take advantage of it. After all, it’s sort of like getting free money. However, even though in your particular case you’re not getting a match, it still makes sense to invest the maximum possible. Not only are there the tax breaks associated with salary deferral programs, in addition, it is an easy and somewhat painless way to invest for your retirement. I’ve always believed that you cannot have too much money invested for retirement and that is why I encourage people, whether they receive a match or not, to put the maximum in their 401(k) Plan. As I’ve mentioned many times in the past, retirement is a brand new concept in the history of mankind and in order to have a comfortable retirement you need resources. The only way most people are going to be able to obtain those resources is to invest on a regular basis and there’s no easier way of doing it than with a salary deferral program.
One other thought regarding your 401(k) Plan is if your company offers a Roth option, you may wish to use it. The downside of the Roth 401(k) is that you’re putting after tax money into the plan versus a traditional 401(k) Plan where you invest pre-tax money. However, the benefits are that when you withdraw the money from the Roth 401(k) it is tax free. When you withdraw money from a traditional 401(k) Plan you’re taxed at that point in time. In addition, money in a Roth 401(k) is not subject to the rules regarding required minimum distributions.
With regard to your allocation in company stock, not only do I think the 50 percent is too high, I also think the 25 percent is too high. As far as I’m concerned, in today’s world I prefer most employees not have any allocation to their company stock. My reasoning has nothing to do with the company or being a loyal employee. My view is purely based on what’s good for you as an investor. It’s important to keep in mind that when you invest in company stock you are taking a greater risk. After all, if something went wrong with the company, not only would your investments be affected, in addition, it is possible that your job could be impacted. In today’s ever volatile world, I prefer to keep one’s investments and their job separate. That is why I’m not a fan of investing in company stock in the great majority of situations. Therefore, when you look at reallocating your 401(k) Plan, other than the amount you may have to leave in company stock, I would prefer you have zero allocation in company stock.
My belief is that it is important for all investors to diversify. By keeping money in your company stock you are at greater risk if bad things happen to the company. For example, look at the situation with General Motors. If you were an employee and an investor in GM Stock, you took a double whammy when they went into bankruptcy. There were many cases where not only did people lose their jobs, but a substantial portion of their 401(k) Plan evaporated. If it could happen to General Motors it could happen to just about any other company. Therefore, to protect yourself and diversify, I generally recommend you do not buy company stock. If you feel that for loyalty or other reasons you should own company stock, my recommendation would then be to keep your allocation at no more than five percent.
Remember, as an investor we wear different hats than when we’re employees. As an employee you should be loyal to your employer; however, as an investor you shouldn’t have loyalty to the investment; rather, you should have loyalty to your portfolio and achieving your specific goals and objectives.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.