When Stock Options Aren't the Best Option
Don't overdose on company stock in your 401(k).
If you have been afraid to open your 401(k) statement for the past few months, now is the time. Open it. Read it.
While this is sound advice for everyone with a 401(k), it is critical for workers whose plans include a company-stock option. "In addition to tremendous exposure to company stock in their 401(k) plans, many people have stock options, so their financial security -- even their employment -- is all based on the success of one company," warns Mark Cortazzo, senior partner of the Macro Consulting financial-planning group, in Parsippany, N.J. "If there is a significant downturn in business, the value of the stock goes down, the equity of their options disappears, their retirement savings are decimated, and they could become unemployed."
Overdosing on employer stock seems to be an occupational hazard for employees of big firms. Company stock represents more than 40% of all assets in 401(k) plans with 5,000 or more participants, says David Wray, president of the Profit Sharing/401k Council of America. In smaller plans, it accounts for only about 9% of assets. About half the large companies that offer their own stock as a 401(k) investment option also use it to match employee contributions.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Although some firms restrict the ability of employees to sell shares received as matching contributions, you always have the right to sell company stock you purchased with your own money.
Remember that there are no tax consequences for sales inside a 401(k). If you decide you have too much company stock, you can sell your shares without worrying about capital-gains tax on any profits.
There are no hard-and-fast rules on how much company stock is too much. Some advisers think company stock should not constitute more than 10% of a 401(k) account. Dee Lee, a financial planner and author from Harvard, Mass., is more liberal. But, she says, "if you have more than 25%, that should be a red flag."
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Five Reasons to Take Social Security Early (and Four Reasons to Wait)
Are there good reasons to take Social Security early? While many experts say it's best to wait until full retirement age to claim benefits, here are some reasons to start early.
By Kathryn Pomroy Published
-
A Letter of Wishes: No Legal Power But Powerful Nonetheless
A letter of wishes lets you explain, in plain language, your intent behind your estate documents, potentially heading off any misunderstandings or disputes.
By Steve Lockshin Published
-
A Spotlight on the Pacific States: The Kiplinger Letter
The Kiplinger Letter Most Pacific states are seeing good job growth in multiple sectors including tourism, hospitality, and construction.
By David Payne Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
A Spotlight on the Mountain States: The Kiplinger Letter
The Kiplinger Letter Most Mountain states are seeing good job growth in multiple sectors from healthcare, energy, and semiconductor production to farming and government.
By David Payne Last updated
-
A Spotlight on the Plains States: The Kiplinger Letter
The Kiplinger Letter The labor market is tight in the Plains states and outside of healthcare and construction most sectors are flat or down.
By David Payne Published
-
Kiplinger's Commodities Forecast
The Kiplinger Letter Following a rocky few years for markets, we expect commodities to be less volatile in 2024, as a post-pandemic normal finally emerges.
By Matthew Housiaux Published
-
Growth Stalls in China As Property Market Continues to Struggle: The Kiplinger Letter
The Kiplinger Letter The property market remains a major drag on Chinese growth, with sales now 50% below their peak.
By Rodrigo Sermeño Published
-
A Spotlight on the South Central States: The Kiplinger Letter
The Kiplinger Letter Outside of the tech sector slump, job growth in the South Central states remains buoyant, with healthcare, construction and business investment going strong.
By David Payne Published