Employees Investing Heavily in Employer Stock

According to a new report from the Institute of Management and Administration, 42% of the funds employees invest in the 401(k) plans of large public firms are invested in company stock. In just the 246 companies surveyed, employer stock accounted for $133 billion in the employees' accounts. The heavy concentration in employer stock has caused concern in Congress and among investment advisors.

Senator Barbara Boxer (D-CA) has introduced legislation that would prohibit 401(k) plans from investing over 10% of their assets in employer assets, but the bill would exempt plans where employees have a choice about the asset allocation in the plan. Almost all 401(k) plans allow employees to choose the asset allocation of their own investments, and most allow employees to reallocate the employer match, even if it is in company stock. The Boxer bill, therefore, would probably have little effect on the percentages IOMA is finding.

Employees do not invest so heavily in Section 423 stock purchase plans, however. Sec. 423 plans allow employees to invest in company stock, often at a discount, in after-tax dollars. Generally, employees can purchase the stock at a fixed price over a one-year period, giving the plans something of the character of a stock option. The plans must be available to all full-time employees and carry certain restrictions on the maximum amount that can be purchased and how long it must be held without incurring tax penalties. A new study of 144 public firms by Towers Perrin found that about two-thirds of the respondents report fewer than 20% of their employees participate in the plan. Forty percent of the employers offer no discount on the stock; 41% offer a 15% discount; the rest offer smaller discounts.