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July 20, 2012

“Wall Streeters Lose $2 Billion In 401(k) Bet On Own Firms”

This Bloomberg July 8th article provides an interesting discussion about an employee’s added risks in investing in their employer’s stock.  The article looks at the 5 largest “Wall Street banks.”   That makes the article even more interesting.  It indicates that those “…who dispense financial advice… aren’t following a basic investment tenet with their own money…”
Those who invest in their companies are at risk for losses “…of both a nest egg as well as a source of income.”  If their companies falters their current and/or future income may be negatively impacted and their net worth (investments in their 401(k) plans) maybe also be negatively impacted.  “You’re already relying on that company for your job, your income, benefits and everything else.”  That is, you lose is magnified.
“Any amount exceeding 20 percent is deemed a concentrated position.”   Some advisors believe that employees should not hold more than 10 percent of the stock of their employers in their retirement accounts.  
“The federal Pension Protection Act of 2006 require companies to allow diversification away from company stock in 401(k) plans.  There has been litigation against large employers alleging that the plans violate the prudent investor rule and/or the Pension Protection Act of 2006.
Because of employer matches of 401(k) contributions and stock options it is likely that some employees will have concentrated positions in their employers stock.  This is a significant factor in how their other assets are invested.  This has a significant impact on how the makeup up of the rest of their portfolio.  The portfolios should minimize the impact of the concentrated stock position in their employer’s stock.
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