Apparently, it’s not the purchase of company stock itself that can lead to retirement disaster, but how it’s done.
Employees continue to invest in their company’s stock, yet more are choosing to invest through an Employee Stock Purchase Plan instead of buying company stock through their 401k, signaling a better understanding and more balanced approach to retirement planning.
Even better, they see it as an alternative to taking a 401k loan.
Boston-based investment behemoth Fidelity Investments finds a growing number of workers are taking advantage of their ESPP to purchase company stock, with the percentage of employees participating in their ESPP increasing to 28 percent in 2016, up from 23 percent in 2014.
Because stock purchased through an ESPP is held outside of an employee’s 401k, shares are more accessible and can be used to help address a variety of financial needs.
Employees say they use company stock acquired through their ESPP which can often be purchased from their employers at a discount—to help pay down debt, add to their retirement savings, finance real estate or home improvement projects, or simply set aside for a rainy day.
“Making company stock available to employees is a great way for companies to motivate their workforce and give workers a sense of ownership in their company, as well as help attract and retain talented individuals,” Mark Haggerty, head of Stock Plan Services for Fidelity Investments, said in a statement. “However, employees should remember that their company’s stock, just like any other stock, should be part of a balanced and diversified investment portfolio, especially if it’s part of their 401k.”
At the same time, Fidelity research shows that both employers and employees are taking a more measured approach to company stock within their 401(k).
Fidelity examined the evolution of company stock within 401(k) plans over the past 10 years, and identified changes in three areas:
1) how many employers offer company stock through their 401(k),
2) how many employees invest in company stock through their 401(k), and
3) the percentage of employees’ 401(k) savings held in company stock.
Fidelity’s analysis revealed:
- The percentage of employees with company stock in their 401(k) has dropped by almost half, from 41 percent in 2005 to 23 percent in 2016.
- More than one in four employers (28 percent) still offered company stock through their 401k in 2016, dropping from 39 percent in 2005.
- Nine percent of employee 401k assets were in company stock in 2016, down from 16 percent in 2005.
Employees are generally optimistic about the future performance of their company stock.
Fidelity found that 83 percent of employees who participate in their company stock plan expect the value of their company’s stock to increase over the next few years.
More than half of employees surveyed (52 percent) said they expect the value of their company’s stock to increase at a modest rate, and more than one in five (21 percent) employees expect the value to increase substantially in the next 24 months.
Company stock can also help employees protect their retirement savings by reducing the likelihood they will borrow against their 401k.
Employees who participate in their company’s ESPP are three times more likely to sell company stock for emergency cash rather than take a loan from their 401(k), and over half (52 percent) added that it was “highly unlikely” they would tap their 401(k) if they needed cash.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
