Vanguard's McNabb: Create New Worker Ownership Vehicle

November 6, 2001 ( - Problems with participants loading up on company stock in their defined contribution plan have led one retirement industry figure to propose giving workers a new way to own a chunk of their employer's company separate from their retirement.

F. William McNabb III, a managing director of The Vanguard Group and head of the firm’s Institutional Investor Group, suggested Tuesday that Congress might institute new tax breaks to encourage companies to give workers an equity stake as part of some new investment vehicle.

McNabb made the comments at the convention of The Society of Professional Administrators and Recordkeepers (SPARK) meeting in Palm Beach, Florida.

The fact that so many employees have overly large chunks of their employer’s stock in their defined contribution plan and that many participants don’t properly appreciate company stock’s unique risks, represents one of the industry’s most pressing issues, he said.

Risk Assessment

“(Participants) know their company. They believe in the company and they feel the risk just isn’t that great,” McNabb said

Adding to this portfolio under-diversification, McNabb said, was the possibility that unsophisticated participants could load up on a single stock through one of the increasingly popular self-directed brokerage options popping up in many retirement plans.

“We think this is a huge issue that’s lurking out there and company stock is just tip of the iceberg,” McNabb told a Tuesday morning conference seminar.

As one way to protect against possible employee stock problems, plan sponsors should have a “trigger point” written into their investment policy, McNabb said. That would specify how far the value of company shares would have to fall before plan sponsors step in to take corrective action.

– Fred Schneyer