Company Stock Down, But Not Out

The lion’s share of DC assets are in TDFs via QDIAs—but HR execs still view company stock as valuable for executives and rank-and-file workers.

Stock drop lawsuits and a lack of interest among retirement plan participants in their company’s—or others’—stock offerings have resulted in fewer retirement plan sponsors offering company stock options to their participants, industry experts say.

The number of plans actively offering company stock to participants continued its decline from 10% in 2011 to 8% in 2020, according to Vanguard’s “How America Saves 2021” report. As a result, as of year-end 2020, only 3% of all Vanguard participants held concentrated company stock positions, down from 9% at year-end 2011.

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That is not to say that benefits executives aren’t interested in and willing to offer their workforces company stock—they’re just not doing so, says Sue Walton, a Capital Group retirement strategist, even when there are revivals of the circa 2000 “dot-com” enthusiasm for some alternative investments, such as Bitcoin.

“I don’t think ‘enthusiastic’ is the word I would use,” for employers’ willingness to offer company stock to executives and workers, Walton tells PLANSPONSOR. “We’ve seen a steady decline [in the offering of company stock] as an investment option, and it’s been taking a lot of work get participants engaged with company.”

Walton says plan design enhancements over the years have also contributed to the decline in interest.

“This is due to sponsors’ realization that there needs to be diversification away from a single stock, from a plan design perspective,” she says. “Thus, fewer and fewer firms are using company stock as a match. This trend is consistent with 401(k) plans being used as the actual, or main, retirement vehicle, as opposed to 20 years ago when it was considered a supplemental savings plan.”

Walton says she understands that companies might view company stock offerings as an attractive incentive, but that they might work best in a pension plan or other institutional wrapper managed by an experienced fiduciary. For 401(k)s or other workplace retirement plans, company stock is “not the best choice, from an investment standpoint,” she says.

Yet despite less interest overall, retirement plan sponsors, especially on the large end of the market, keep offering company stock as an option, often through brokerage windows, Capital Group finds. 

Sandy Pappa, principal consultant at Buck Global LLC, says company stock can benefit the business offering it, as well as employees. “The value of company stock is to get employees to be part owners and give them an incentive to work harder and make the company succeed,” she says.

“Firms may offer company stock in 401(k) plans for tax reasons,” she adds. “Some companies may freeze, eliminate or restrict company stock—but I still think the largest plan sponsors [will continue to] maintain company stock, particularly with [the Fortune 500] companies I do consulting with.”

Despite lawsuits alleging an overconcentration of participants’ assets in company stock, this equity choice can diversify participants’ portfolios, Pappa says.

“I don’t think [company stock] will totally go away due to the growing awareness among participants of the importance of diversification,” she says. “Participants are far more educated than 20 to 30 years ago.”

However, Pappas notes that regulators require plan sponsors that offer company stock to issue notices to participants once they reach a certain allocation threshold in the investment to tell them they may need more diversification away from it.

In addition, to ensure they are meeting fiduciary responsibilities for investments “some [of my clients] have hired independent outside fiduciaries to oversee the availability of their company stock in their retirement and other benefits plans, to report back to the board whether the stock continues to be an appropriate investment,” she says. “Fiduciaries are now taking a more active role in the purpose of DC plans. There’s an emphasis on financial well-being and there is continuous messaging to employees on the importance of saving for their future—and diversification is always threaded through that. If an administrator is doing its job right, it will ensure that these things are in place and report on them to the board’s investment committee frequently.”

Precautions Needed

Benefits consultants say that for those sponsors that are offering company stock, guardrails need to be put in place to keep participants from becoming, as one source put it, “cowboys.”

One of Buck’s large financial services clients benchmarks what all the big-name companies are doing with respect to the company stock that they are offering to their plans, Pappa says. Other clients offering company stock limit the exposure that each plan participant can have to a specific stock, or even put a freeze on purchases if the amount gets too high. “They’re doing a number of things,” she says.

Buck is helping plan sponsors be smart about the oversight of their participants’ non-mutual fund equity exposure, taking into consideration the tremendous increase in the S&P 500’s value, even since the start of the pandemic, Pappa says. “There is a huge difference between an increase in company stock exposure and an increase in the S&P 500’s value,” she points out. (The S&P 500 is up nearly 90% from its March 2020 low.)

The bottom line for sponsors thinking of offering or that already have company stock on the investment menu? “Always look to see what is happening with plan participants’ [money] and their behavior,” (i.e., examine things such as 401(k) trades) she says.