Employees used to buy a lot more of their companies’ stock—purchasing shares through their 401(k)s—but that’s been changing.
Now instead of loading up their retirement plans with stock, they’re buying shares through an employee stock purchase plan.
That’s according to new research from Fidelity, which identifies the trend as a positive one.
The danger of having too much company stock in a retirement plan was highlighted in a particularly spectacular way with the downfall of Enron, and experts have been advocating for years now for greater diversification in 401(k)s rather than relying on company stock.
It seems that at least some employees have gotten the message. Fidelity’s research tracks the evolution of company stock within 401(k) plans over the past 10 years, and finds changes in three areas:
how many employers offer company stock through their 401(k)
how many employees invest in company stock through their 401(k)
how much of employees’ 401(k) savings is held in company stock
Not only has the percentage of employees with company stock in their 401(k) fallen by nearly half, but the number of employers offering company stock through their 401(k)s has also dropped—although not by as large a proportion.
In 2005, 41 percent of employees held company stock in their retirement accounts, but by 2016 that had fallen to just 23 percent. And while 28 percent of employers as of 2016 still offered company stock in 401(k)s, that has fallen from 39 percent in 2005.
And the concentrations held in stock are lower, too, with just 9 percent of employee 401(k) assets in company stock in 2016, compared with 16 percent in 2005.
Instead employees are turning to ESPPs to buy company stock. They’re still optimistic about its value, with 83 percent of employees who participate in their company stock plan expecting the value of their company’s stock to increase over the next few years. In addition, while 52 percent say they expect a modest increase in the stock’s value, 21 percent expect the value to increase “substantially” in the next 24 months.
Buying the stock in an ESPP rather than in a 401(k) is beneficial to retirement plans because it lessens the likelihood that employees will raid retirement savings to get emergency cash.
Employees who participate in their company’s ESPP are three times more likely to sell company stock for emergency cash, the analysis reveals, rather than take a loan from their 401(k), and 52 percent added that it was “highly unlikely” they would tap their 401(k) if they needed cash.
Another advantage is that stock is more easily accessible in an ESPP than in a 401(k), and employees say they draw on it to help pay down debt, add to retirement savings, finance real estate or home improvement projects or just set the money aside for a rainy day.