Do you know where your 401(k) contributions are going?
If you haven’t been paying attention, they might be in trouble.
Ten of the largest 50 companies in the S&P 500 index invest employees’ 401(k) contributions in company stock, according to Bloomberg’s ranking of retirement plans based on data filed last year.
That’s potentially doubly bad news for employees at such companies, Bloomberg reports:
When there’s trouble at your company, or an industry downturn, you don’t want your retirement plan whacked at the same time your working life is destabilized.
Bloomberg ranked S&P 500 company 401(k)s based on eight criteria, including whether the company required matching funds to be used initially to purchase company stock. The top 10 companies were:
- ConocoPhillips (score of 85)
- Boeing (83)
- Amgen (80)
- Citigroup and McDonald’s (both 78)
- MasterCard and Philip Morris International (both 77)
- Google (76)
- Altria Group (75)
- 3M and Visa (both 73)
Company stock continues to shrink as a share of overall 401(k)s holdings. In the 1990s, it made up more than 30 percent of holdings, but dropped to 11 percent at the end of last year, according to data from consulting company Aon Hewitt.
This year, Chevron stopped matching its employees’ 401(k) contributions with company stock. Chevron spokesperson Melissa Ritchie tells Bloomberg that the change will “help employees maintain a diversified portfolio” that meets “their goals, time horizon, and risk tolerance.”
The practice of using company stock for a 401(k) match is an “extreme example of poor diversification,” according to economists Shlomo Benartzi of UCLA and Richard H. Thaler of the University of Chicago.
They explained in the Journal of Economic Perspectives in 2007:
First, a single security is much riskier than the portfolios offered by mutual funds. Second, as employees of Enron and WorldCom discovered the hard way, workers risk losing both their jobs and the bulk of their retirement savings all at once.
If you’re unfamiliar with more broadly diversified investing alternatives such as mutual funds, you’re in the right place. Money Talks News founder Stacy Johnson frequently writes about ways to invest. Start with “Ask Stacy: How Do I Invest In A Mutual Fund?”
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