August 19, 2013 (PLANSPONSOR.com) – Research from Morningstar suggests holding significant amounts of employer stock in 401(k) plans is bad for companies’ bottom lines.
analysis found firms with employees who have higher allocations to employer
stock in 401(k) plans have tended to underperform those without. Morningstar
says this underperformance can primarily be attributed to two factors:
companies with higher allocations to employer stock in their 401(k) plans tend
to have a market beta that is less 1.0, and therefore have underperformed given
a positive equity-risk premium.
these companies tend to have a large-cap tilt and sacrifice the small-cap
research found noted a slope of –7.5% for future annual relative market
performance (as a percentage of 401(k) plan assets invested in employer
securities) and an annual five-factor alpha of –1.8% over the entire period of
the analysis (i.e., a company that has a 50% allocation to employer stock would
have underperformed by 3.75% on an absolute basis and .90% on a risk-adjusted
basis). Using 36-month rolling historical five-factor regressions, Morningstar noted
an average underperformance for those companies with 40% or more invested in
employer securities to be –2.05% and a five-factor alpha of –1.10%.
findings contribute to the already strong argument against employees holding
significant company stock allocations and reinforce our stance that employers
should minimize (or even eliminate) participant investment in employer
securities,” Morningstar said in its research report.
The report is here.