When Stock Options Aren't the Best Option

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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.

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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."