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Chapter 6. Foolish Risks > Your 401(k) Plan

Your 401(k) Plan

Could this happen to you or employees at other companies? Over 2,000 companies offer company stock in their 401(k) plan, and many of those match employee contributions with company stock. Of those firms that offer company stock in their pension plan, over 30% of plan assets are in the company stock.[7] The retirement plan at Coca-Cola has 90% of its assets in the company stock. Although some of this stock is given as a match of employee contributions, employees allocate 76% of their own discretionary contribution in Coca-Cola stock. Merck employees have 70% of their 401(k) assets in the company stock. When the company stock experiences large declines, overconcentrated employees suffer. Employees of Lucent Technologies and Ikon Office Solutions have recently experienced declines in their 401(k) plans assets, which are mostly due to overconcentrations in the company stock. The predicament of the employees from Lucent and Ikon are not as dire as those of Enron. But clearly, there is potential for other people to experience the life-changing disaster that befell Enron employees.

Why do employees invest so much of their wealth in the company they work for? This is very risky. Unfortunately, it is the type of risk that is not rewarded. However, employees do not believe that the stock of their company is very risky. For example, investors were asked this question: Which is more likely to lose half of its value, your firm or the overall stock market? Of course, it is far more likely that any single company would experience such a large price move than would a diversified portfolio, especially the overall market. Owning one firm is riskier because you assume both market risk and firm-specific risk. Over 1,000 investors responded to the question on the Morningstar.com Web site.[8] Only 16.4% of the respondents believed that their company was riskier than the overall stock market. Of those investors who did not attend college, only 6.5% believed that their company was riskier than the stock market.


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