Company Stock in 401(k)s Bad for the Bottom Line?

August 19, 2013 ( – Research from Morningstar suggests holding significant amounts of employer stock in 401(k) plans is bad for companies’ bottom lines.

The 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:

  • First, 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.
  • Second, these companies tend to have a large-cap tilt and sacrifice the small-cap premium.


The 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%.

“These 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.