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Don't invest your 401k money in company stock

According to research by Hewitt Associates, an alarmingly large percentage of people have too much money in their 401k accounts invested in company stock. (Link to press release)

Employees' commitment to company stock remains significant. On average, employees holding company stock had 41 percent of their balances in that investment, essentially unchanged from 2002. More than one-quarter (27 percent) of employees held 50 percent or more of their 401(k) plan balances in company stock, which may be attributable to years of accumulation of company match and profit sharing.

"What's particularly sobering is that more than a quarter (30 percent) of workers age 60 or older has the majority of their money in employer stock," Lucas added. "Whether it's due to company loyalty, lack of investment knowledge, or a desire to 'swing for the fences' with their investments, older employees are subjecting their retirement portfolios to considerable risk at a time when retirement is just around the corner."

After the collapse of Enron, many of Enron’s employees whined about their retirement savings being wiped out. My take was that it served them right for having all their 401k money invested in Enron stock. And I thought that if any good came out of it, it would be that people at other companies would learn the dangers of keeping all their eggs in one basket.

Apparently the lesson has not sunk in. Thirty percent of workers 60 or older have the majority of their 401k money in company stock. These people should have 100% of their money invested in a safe money market fund.

In fact, with all asset classes overvalued right now, people of all ages should have 100% of their 401k money invested in a money market fund, unless they really know what they’re doing.

An exception would be if your 401k plan allows you to invest in an oil and natural gas fund, because I am bullish on the long term profitability of companies with good oil and gas assets, because of the coming decline in world oil production.

But most 401k plans only allow you to select from a group of non-sector specific stock funds, so therefore my advice to such 401k participants is to play it safe and invest in the money market fund, even though it pays a pathetically low interest rate.

UPDATE

For more investing advice, visit my Contrarian Investing Blog.

posted Saturday, June 19, 2004

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