Advice Providers Differ On Company Stock Treatment

PLANSPONSOR.com spoke with mPower, Financial Engines and Morningstar to get their take on company stock.

Process of Elimination

If Enron’s implosion had not occurred so rapidly, mPower would have been its advice provider through an alliance the firm formed last year with Hewitt Associates to offer advice to all of its clients. Hewitt became Enron’s recordkeeper last fall.

Neil Ringquist, executive vice president of sales and marketing at mPower, told PLANSPONSOR.com that Enron was supposed to sign up for the service in November but did not. However, if the firm did go live with the advice provider its clients would have been given the same kind of advice all of mPower’s clients are given: to eliminate their exposure to company stock.

“When left unconstrained we would recommend a portfolio that would not include company stock,” he said. “As a single security [company stock] doesn’t make sense to building a well-crafted portfolio; you have sector risk and company specific risk which you can’t diversify.”

To help mPower clients understand why they should not be invested in company stock, Ringquist says the company’s model will show a participant two versions of his current portfolio, one that includes his company stock investments and one that does not.
 
“In many instances the upsides are greater with having more money in company stock,” continued Ringquist. “But we try to educate clients to understand that the downsides of being heavily invested in company stock are even greater.”

However, the mPower advice model is also sensitive to company matches. In this case, where most employees weren’t free to sell Enron’s match in company stock, the model would assume that this part of a client’s portfolio is frozen. So, instead of stressing total elimination of company stock, mPower would provide recommendations for allocating the assets around those matched by the company.

Suggesting Caps

Meanwhile, at Morningstar, participants are encouraged to limit their company stock investments to 10% of their overall portfolios. Michael Skinner, vice president of business development and head of retirement strategy at Morninstar, told PLANSPONSOR.com that if a participant has more than 10% in company stock he would be automatically directed to a page explaining the dangers of being overly invested in company stock.

At the same time, a participant will be advised to limit his exposure by creating a new portfolio that gradually lowers their holdings or by trying a slew of diversification tactics supplied by Clearfuture, Morningstar’s advice product.

“When we began marketing Clearfuture to sponsors and providers we absolutely made it a point to highlight that our product would overtly addresses company stock,” he said. “We felt that as a prudent fiduciary we needed to alert participants to the effects of holding too much of their account in company stock.”

“There needs to be a change in how we define the success of a plan,” Skinner continued. “The mark of a healthy plan should be gauged by how many participants have a portfolio that accurately reflects their retirement income goals and objectives, risk tolerance, retirement age and accurately balanced to reflect diversification and a prudent level of portfolio construction.”

Informed Decision Making

Financial Engines takes neither approach. Instead, the advice firm encourages participants to choose their own risk strategy based on “forecasts” created by the firm’s model.

Each forecast will tell a participant the outcomes of different scenarios based on their current portfolio such as the chances of reaching retirement goals, retirement income, the amount of money a participant can lose over a year based on their investments and the effects of changing their exposure to company stock.

“We’ve found that a one size does not fit all,” said Jeff Maggioncalda, president and CEO of Financial Engines. “So, rather than flag an individual who has too much invested in company stock, everyone sees the risk screen which explains the impact on their future. This way, anyone who has any company stock is presented with the impact of changing their investment in company stock on their portfolio.”

On Legislation

Like many insiders, advice providers are concerned that the legislation being proposed by Congress will have adverse effects on 401(k) plans. And, in Enron’s wake they all intend to address company stock with their clients by putting up articles on their Web sites on the subject or working with sponsors to help them understand the significance of the investment on their participant’s portfolios.

Going forward, every advice provider said that advice is a part of the solution. And, while it may not have helped Enron’s participants, they say they believe it will help others make prudent decisions regarding their retirement accounts in the future.