One growing concern among plan sponsors is the growing threat of litigation against companies with heavy concentrations of their own stock in retirement plans. So-called “stock drop” suits were filed against 211 companies from 1997 through 2010, according to Cornerstone Research, which tracks the litigation.
“A sure-fire way to get sued for ERISA violations is to have a big chunk of your plan in company stock, and then have the share price fall 25 percent,” says Ryan Alfred, Brightscope’s co-founder and president. “All of these companies [on Brightscope’s top ten list] will get sued when their stock falls.”
The plaintiffs don’t always win, of course, but Cornerstone reports that 99 of the cases it tracks have been settled, with the mean settlement amount of $20.8 million.
“If more than 20 percent of your account is in company stock, it’s likely to be too high,” says Marina Edwards, a senior retirement consultant at Towers Watson. Wohlner is more conservative, advising retirement savers to limit holdings in their employers’ shares to five to ten percent.
Your company stock may appear safer than the market in general until it’s not. This ‘all in’ strategy can make you rich or poor. When things go bad in a company you may not learn about it until it’s too late.
Please comment or call to discuss how this affects you and your plan.
- The Use of ERISA § 3(38) Investment Managers in Defined Contribution Plans (401kplanadvisors.com)
- Spotlight on 401(k) fees may help many saving for retirement (401kplanadvisors.com)
- Small 401(k) Plan Litigation and the Nuisance Value (401kplanadvisors.com)