I was somewhat surprised to see how many plans still offer company stock as an investment option.
The Plan Sponsor Council of America’s survey data from 2000 showed that 39% of surveyed plans offered company stock as an investment option. Today, I was surprised to see that 18% of surveyed plans still offer company stock, and that 14% of all plan assets are invested in company stock.
In my favorite study on “financial wellness,” or “financial fitness,” or perhaps “financial illness,” Professor Olivia Mitchell of The Wharton School and Professor Annamarie Lusardi (now at George Washington University) confirmed one of the challenges plan sponsors and the retirement industry face when it comes to financial literacy. That 2013 study, “The Economic Importance of Financial Literacy,” confirmed Americans are often not prepared for simple financial decisions.
This study comes to mind when I think of company stock in retirement savings plans because it asks a specific question about owning a single company stock. In the study, the professors looked at three concepts – compound interest, inflation and risk diversification.
The three multiple choice questions asked in the study were as follows: 1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: [Possible answers: More than $102, exactly $102, less than $102? Do not know, refuse to answer.]
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy: [Possible answers: More than, exactly the same as, or less than today with the money in this account? Do not know; refuse to answer.]
3. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund. [Possible answers: True, False, Do not know; refuse to answer.]
These three questions were first piloted in a special financial literacy module of the 2004 Health and Retirement Study (HRS) on U.S. respondents age 50 and older. Only a third could answer all three questions correctly!
Numerous, subsequent surveys generated comparable results.
Results like these should make you wonder about the investments offered in your retirement savings plan – including company stock. And, perhaps worse, studies show that financial decision-making capability often declines with age.
Soon after 2000, a number of major corporations declared bankruptcy – including but not limited to ENRON, Pacific Gas & Electric, Global Crossing, Adelphia Communications, WorldCom, Tyco, US Airways, and Conseco.
Others “bellied up” during the Great Recession. And, over the past 10 years, we have seen more than 100 “stock-drop” lawsuits.
As a plan sponsor, I had a hand in removing company stock from our 401(k) plan in February 2006. Not long after that, the Pension Protection Act of 2006 added specific provisions regarding diversification relative to company stock.
Most of your plan participants probably joined your plan after these bankruptcies, after the Pension Protection Act of 2006, and after the Great Recession. So, if you offer company stock as an investment option in your retirement savings plan, you may want to take another look at what you offer and how those investments are communicated to participants.
Jack Towarnicky is Executive Director of PSCA.