Got a Big 401(k)? Chances Are, You Got a Problem | Personal Capital
Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.

Don’t settle.

Live the retirement you want.
Get a free review of your retirement strategy today.
Daily Capital
Home>Daily Capital>Retirement Planning>Got a Big 401(k)? Chances Are, You Got a Problem

Got a Big 401(k)? Chances Are, You Got a Problem

Think the wealthy have a leg up on financial smarts? Think again. Retirement advisory firm Financial Engines recently took a spin through nearly 3 million 401(k) accounts and found that among folks with at least $500,000 in assets, about one-third had in excess of 20 percent of their retirement account invested in their company stock. Yikes.

A very basic rule of diversification is to keep any single stock investment to no more than 10 percent of your assets. So put another way, about one-third of the folks with bulging 401(k) accounts are taking twice as much risk with their retirement account as is deemed prudent. Sure, if they have boatloads more retirement money in other accounts maybe the overall impact of their company stock is mitigated. But I’m not betting that is what’s going on. The fact is, we get lulled into thinking the company we work for could, never, ever disappoint. And that’s just asking for trouble.

To be fair, it’s not just the well off who are screwing this up. According to the non-partisan Employee Benefit Research Institute, more than one-third of folks with access to company stock within their 401(k) have more than 10 percent of their assets riding on their company’s stock.

Among the 50-something crowd, about 40 percent have in excess of 10 percent tied to the fortunes of their employer’s stock. And as the table below from EBRI shows, among those Baby Boomers 13.5 percent have more than half of their 401(k) riding on company stock. Double yikes.

Maybe you have a pretty good line on the fact that your firm isn’t committing outright fraud, so you’re not too worried about Enron risk: At the time Enron went under, the majority of employee retirement assets were invested in company stock. Granted, the fraud issue is a bit of an outlier. But you can’t know for sure what external factors might smack your company stock. For example, BP’s stock plunged about 50 percent in the wake of the 2010 Gulf Oil spill. That smacked BP workers silly: turns out that about one-third of the firm’s 401(k) was sitting in company stock.

The point is you just can never be absolutely sure. One of the biggest favors you can do your 401(k) and retirement security is to apply Pascal’s Wager to your decision-making process. Full disclosure, Pascal was in fact a 17-century mathematician and philosopher. But his advice could not be more spot-on for today’s 21-century investing world. Pascal laid down an elegantly simply challenge to our thought process and decision-making. Here’s a pared down paraphrase of Pascal’s challenge:

When you can’t be sure of something, what is the consequence of your assumption being wrong?

So, um, what’s this got to do with your 401(k)? Well, let’s say you have a big chunk of your retirement account riding on your company stock and it turns out you were “wrong” in the sense that something — anything — triggers a big drop in the stock. The repercussion is going to be a lot more severe than if you were “wrong” and had just 10 percent or less of your 401(k) invested in the stock. (For more on Pascal, check out Against The Gods –The Remarkable Story of Risk by Peter Bernstein.)

Come on, you can’t honestly argue with the logic of mitigating your risk. So if you have more than 10 percent or so of your retirement assets riding on company stock, time to think about diversifying a bit. Even if your employer gives you your matching contribution in stock, you can swap it for any of the other investment options inside your 401(k). That’s not betting against your employer. It’s safeguarding your future. Your career is already tied to this employer, perhaps you also have stock options that tie you to the fortunes of the company’s stock. That’s great. But because of all that company-specific risk in your career, it becomes even more important to vigilantly keep your 401(k) from making too big a wager on company stock.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Carla Fried is a freelance journalist who has covered just about every nook and cranny of personal finance for media including Money Magazine, The New York Times, and CBS Prior to launching her own reporting and writing business in 2002 she was a senior writer at Money and the managing editor of
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.