By Jilian Mincer
Conventional wisdom says it’s a bad idea to buy a lot of stock in the company that employs you. But what if it’s a screaming buy or seems like the safest choice.
That’s what a lot of rattled 401(k) investors are thinking. In the last few days, there has been a significant uptick in trading within 401(k) plans, including to company stock, according to consulting firm Aon Hewitt. Last Wednesday when the market tanked more than 500 points, two-thirds of the transfers in 401(k) plans it tracks went into company stock. So far in August, almost 17% of the assets traded in 401(k)s went into company stock. That may seem small, until you consider that from January through last week, 401(k) assets in company stock decreased by nearly 8% to $16.81 billion. “I think it’s opportunistic buying,” says Pam Hess, director of Aon Hewitt’s retirement research. “After a significant decline, there is a subset of people with larger balances who are moving into company stock.”
It makes sense — workers are worried about the market volatility, have confidence in their companies and recognize a good price. But there are big risks, too. Most advisers recommend never owning more than 5% to 10% in any single security, and company stock can leave workers doubly vulnerable: If the business goes bad, they can lose their investment and their job. On top of that, “the volatility of a single stock is so much higher than the broad market,” says Hess.
Some workers may end up owning more company stock this year even without shifting assets if they are among the millions who participate in an employee stock-purchase plan. About a third of companies offer workers the opportunity to purchase up to $25,000 in company stock at an 11% to 15% discount through payroll deductions, according to National Center for Employee Ownership. Most plans base the discount on either the price at the beginning or the end of the offering period. Workers indicate the percentage of salary or dollar amount they want withheld from each paycheck during an “offering period.”
And it may make sense to wait, especially if your plan has a “look-back provision,” which allows workers to buy stock on either the first day or last day of the offering period. For example, if you had a six month look-back period and the stock went from $50 on Jan. 1 to $40 on June 30, you could buy the stock at the lower of the two prices. “If the fiscal year ends during this volatility, it could be a huge benefit if stock prices are coming back,” says Loren Rodgers, executive director of the center. But, he says, even without it, “There’s always a benefit if you can buy at the discount.”
Some plans even allow employees to buy the stock at its lowest price during the look-back period, says Joan Bloom, senior vice president of Fidelity Stock Plan Services. And that could work out very well for healthy companies whose stocks temporarily dropped during the current volatility. Another silverlining: if the price temporarily drops, the employee gets to buy more shares for the same amount of money. For example, say you decided to set aside $1,000 a month for shares, and the stock price drops from $100 to $85, you’ll get more shares for the $1,000.