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The Employee Ownership Update

Loren Rodgers

August 15, 2013

(Loren Rodgers)

Employer Stock in 401(k) Plans Associated with Poorer Company Performance

Publicly traded companies with significant 401(k) investments in employer stock performed worse relative to companies without company stock in their plans, according to a new study, Employer Stock Ownership in 401(k) Plans and Subsequent Company Stock Performance (PDF), by David Blanchett, the head of retirement research at Morningstar Investment Management.

The analysis provided a number of complex measures of performance, some of which corrected for prior stock price movement, relative size and risk, different ways to weight companies, and other factors. Overall, the study found that a portfolio with 50% in employer stock underperformed historically by 3.75% per year on average, although the results had a 7.7% chance of being a random finding. Looking at measure that included five different factors to adjust results to eliminate effects unrelated to holding company stock, Blanchett found that "companies with higher levels of company stock have historically underperformed their peers on a risk-adjusted basis . . . by .18% for each 10% of the 401(k) invested in employer stock." These results were not statistically significant, meaning there is more than a 5% chance they were random.

By contrast, the no-employer-stock composite has an average relative outperformance of +.36% per year. Using 36-month rolling historical analysis, Blanchett found that there was "an average underperformance for those companies with 40% or more invested in employer securities to be -2.05% [per year]and a five- factor alpha [a measure to adjust for extraneous factors in performance] of -1.10%."

Blanchett found that employees tend to increase holdings when company stock prices have been increasing and decrease them when they fall (we at the NCEO found the same pattern for ESPPs). That, of course, is the opposite of what an ideal strategy would be. Because stock values tend to revert to the mean, the fact that employees do this means that increasing percentages of holdings by employees of employer stock would be associated with relative poorer future performance. That may, in fact, sufficiently explain why the relationships he found held true.

Employer stock in 401(k) plans has been steadily declining over the study period. For example, 2011 research by Aon found that only 12% of large public companies require matching contributions to be invested in employer stock, down from 36% in2005. Previous research by the NCEO and others found that, unlike companies with ESOPs, companies with stock in their 401(k) plans are no more likely to have ownership cultures than companies without it. Many people involved with employee ownership, including the NCEO, argue that 401(k) plans should generally not be used for employee ownership purposes, but instead should be diversified investment vehicles for retirement.

The Morningstar study was based on a total of 4,871 companies between 1999 and 2011 drawn from Department of Labor Form 5500 data. Companies both had to have company stock in the plan and sufficient data on performance available from Compustat to be included. An average of 2,500 companies showed up in each year during the study period.

AICPA President Opposes Making ESOP Appraisers Plan Fiduciaries

Barry C. Melancon, the president of the American Institute of CPAs (AICPA) wrote an open letter to the leadership of the relevant House and Senate committees (PDF) in which he stated, "If the DOL were to redefine an ERISA fiduciary to include ESOP appraisers an inherent conflict would arise between the DOL and IRS requirements for ESOP appraisers." While AICPA has opposed this proposal in the past, that position is now over the signature of the group's president. In the letter, Melancon describes the DOL's position as "a draconian response to a very small number of deficient ESOP appraisals."

Employee Ownership Management Course at UC San Diego

The Beyster Institute will hold its annual course for strategic level management employees of ESOP companies on October 13-16 at the University of California, San Diego. This course, one of the three courses that comprise the Institute's Employee-Ownership Governance Curriculum, covers legal and regulatory challenges, governance issues, financing, marketing, education, and culture. This program has been conducted for the past 11 years, and over 200 executives have participated. Early registration ends on August 23.

Examples Needed for Wellness Programs at ESOP Companies

The NCEO will be reissuing a revised version of its popular issue brief on wellness and employee ownership programs. We are looking for good examples of wellness programs to profile. If your company has one and you would be willing to share what you do, please contact Corey Rosen at

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