NEW YORK — When Color Tile, a floor-materials chain with 774 stores in 48 states declared bankruptcy earlier this year, employees suddenly learned a horrible fact: 83 percent of the assets in their 401(k) retirement plan was invested in Color Tile's own stock and real estate.
Color Tile employees now face not only the threat of unemployment, but possible loss of some or all of their retirement dollars.
Unique? Unfortunately not. A similar situation occurred in the early 1990s in the Los Angeles area when a major local retailer went bankrupt. The retailer had directed more than half of its 401(k) money into its own stock.
In these two cases, the 401(k) salary-reduction plans did not provide for broad diversification, such as investing in a mix of bonds, mutual funds, and money-market accounts. But even within plans providing such choices, and where the participants themselves can choose among a menu of options, many employees are putting a substantial portion of their retirement dollars into their own company's stock, rather than diversifying their holdings. That lack of diversification, many financial experts say, is very risky.
According to a study released last week by the Institute of Management and Administration (IOMA), a New York-based financial information firm, employees who work for the largest US corporations appear to be socking away the lion's share of their 401(k) retirement dollars into their own company's stock.
Surveying 246 of the nation's largest firms, IOMA found that 232 of these companies have 42 percent of their 401(k) plan, or roughly $133 billion, in company stock, compared with 24 percent in GICs (guaranteed investment contracts, which are stable-value funds or securities), and 18 percent in diversified equity options.
IOMA was stunned by the finding, says Sean Hanna, who edits the organization's semimonthly "Report on Defined Contribution Plans." "From all indications, the percentage of 401(k) assets going into large-company stock appears to be on the increase."
"Company stock can be a wise investment, but it is not prudent for a person to put the largest percentage of their retirement money into a single stock," he says, and especially, "the same company you work for."
When it comes to retirement dollars, diversification is crucial, he says.
In terms of all 401(k) plans nationally - representing both large and small companies - most employees seem to be wisely refraining from stashing all their retirement eggs in the employer's stock basket. About 22.3 million individuals participate in 401(k) plans in the United States, although 29 million people are eligible, says Jeffrey Close, a spokesman for Access Research Inc., a financial-services consulting firm in Windsor, Conn.
At the end of 1995, 23 percent of all 401(k) assets were in company stock; 22 percent in GICs; 14 percent in balanced funds; 21 percent in all other equity funds; 8 percent in bonds; 6 percent in money-market accounts; and 6 percent in miscellaneous items. The level in company stocks has dropped from a high of about 29 percent of all assets in 1989 to the current 23 percent, Mr. Close says.
But why then do individuals within large US corporations put the bulk of their investment dollars into their company stock?
One reason is that many companies provide matching dollars only for company stock, as opposed to other investments, Mr. Hanna says. Another is that employees find it easier to understand investing in company stock than in alternatives, such as mutual funds, since there is usually frequent discussion of the company's financial position and stock within the corporate setting. Finally, employees see such investments as loyalty to the firm.
Businesses usually welcome 401(k) money from their workers, Hanna notes. Company employees, after all, are seldom going to challenge corporate-board policies, which nonemployee shareholders might do. And by buying company stock, the employees are helping to shore up the value of their firm's equity.
Under current law, only 10 percent of money in traditional pension plans, where the company sets up the retirement package with its own money, can be put into company stock and company real estate.
But legislation introduced in July by Sen. Barbara Boxer (D) of California would prohibit companies from investing more than 10 percent of an employee's 401(k) assets in the employer's securities and real estate. These are employer-directed plans, where the company controls the 401(k) money. But employee-controlled plans - where the employee selects from a menu of choices, such as stock mutual funds and bonds - would be exempt. It would be the employee's decision to put more than 10 percent in company stock. (The legislation does not affect employee stock-option plans.)