Consulting Firm Recommends Against Concentration of Company Stock in DB and DC Plans

November 22, 2004 ( - Consulting firm Ennis Knupp is recommending that plan fiduciaries avoid a concentration of company stock in their defined benefit (DB) and defined contribution (DC) investment programs.

In a research report, the consulting firm asserted that it is not prudent to have exposure to single-security risk in DB or DC plans, and any fiduciary who finds him or herself in such a position should reevaluate such holdings.

This advisory opinion is not meant to apply to Employee Stock Ownership Programs (ESOPs), since they are specifically designed to invest in company stock and should be viewed as a source of wealth creation and an ownership tradition and not a retirement savings investment vehicle, according to the company.

If plan sponsors wish to retain the use of company stock as part of a DB or DC plan, Ennis Knupp recommended that they:

  • make company stock investments clearly an alternative, and not the main part of a plan.
  • not mandate any unique liquidity constraints on a company stock alternative.
  • If a company makes matching contributions in the form of company stock, it should provide for an immediate reallocation of these funds according to the participant’s allocation choices.

EnnisKnupp also recommended that fiduciaries for any plan that has company stock should:

  • never use company stock as a default investment option.
  • take another look at communication, education, and advisory campaigns regarding the risks of single-security portfolios.
  • consider requiring participants to complete a form acknowledging the risk associated with company stock.

The consulting firm also recommended that in the case of DB plans, any fiduciary in receipt of company securities should implement a program to either liquidate or monitor such investments.

In the research report, the company also made note of how often company stock is included in plans. Only 3% of DC plans offer such stock, but because they are often the largest firms, 42% of DC plan participants have access to company stock. Concentration of stock is not usually a severe problem however, with only one in three employers offering company stock with concentrations exceeding 20% of plan assets. This concentration is quite highly correlated to plans that offer matching contributions with company stock. The Vanguard Group noted that in 2003, company stock made up 17% of plan assets in plans matching in cash, and 44% in plans matching with company stock, according to Ennis Knupp.

The report also pointed out when plan participants most often included company stock in their portfolio. According to Ennis Knupp, employees often choose company stock when it has historically done well. Also, the presence of company stock as an option for investment seems to offer an implicit endorsement of such investments, since this raises the percentage of employees holding such stock.

Chicago-based EnnisKnupp and Associates ( ) is an investment consulting firm for institutional investors.