Ignoring the Need for Diversification in 401(k) Plans
There have been a few articles of late about the trend for employees to continue to over invest in company stock in their 401(k) plans. Notwithstanding what happened to Enron employees (you know.... put all of their retirement eggs into Enron stock and the company went belly up), the research shows that employees are still inclined to turn a blind eye to prudent investing principles and place too much emphasis on company stock. According to one article:
"In a 2005 report on 401(k) plans by Hewitt Associates that looked at more than 2.5 million eligible employees, company stock was the single largest holding for the average participant. Large U.S. equity funds came in second... Plan participants held an average of 26.5 percent company stock in 2005, with just over a quarter of the participants holding half or more of the total in their employers' shares...[and] 28 percent of participants 60 or older held at least half their plan balances in company stock - at a time when experts strongly urge diversification against risk as workers approach retirement."
Some of this may be due to the fact that more companies used to match in company stock. My sense, however, is that there are a few things going on here. There is a certain amount of blind loyalty that employees have to their employers - a sense of doubt or disbelief that something could go wrong. In addition, I also believe that employees think that because they are insiders, they "know" more about the company than the average investor on the street. The seeming knowledge makes them tend to invest more in company stock. How's that for my bit of investor psychology? In any event, perhaps we should be doing more to educate employees about prudent diversification in investing.
