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July 17, 2002
Danger in No Pension, Lots of Company Stock
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Why is that important? Because it leaves many workers lacking diversification, putting them at the mercy of a company's rise or fall.
The Washington Post reports that the service examined forms filed with the Securities and Exchange Commission by 278 large U.S. companies. It found that company stock accounted for 38 percent of the assets in the average employee defined-contribution plan.
Patrick J. Purcell, the study's author, noted that defined-contribution plans, like the 401(k), have grown so much in popularity over the last two decades that they've replaced or augmented more traditional, defined-benefit pension plans, in which the employer bears the investment risk and the employee is entitled to a set pension payment.
Larger companies often match a certain percentage of employee contributions to a 401(k) plan, usually with company stock. The employees often depend on that stock as a primary way to save for retirement. It partly has to do with loyalty, but the employees also know that larger companies have historically performed well and appeared stable, said Stephen Utkus, director for the Vanguard Center for Retirement Research in Malvern, Pa.
"The difficulty is, of course, it's not a diversified position," Utkus said. "They lose big if the stock does poorly."
There is much greater mobility in today's workplace, Utkus said, and most employees leave a company before earning a pension under a traditional plan, in which the size of the payout depends on the number of years of service.
To read the Washington Post article, click here.
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