Many Still Invest in Company Stock
May 20, 2002
The downfall of Enron of Houston evidently has not caused some retirement plan participants to be wary of how much they have invested in their company's stock, according to a recent survey by Boston Research Group of Hopkinton, Mass.
The survey, conducted in mid-April among 100 401(k) plan participants who invested in company stock prior to October, found that only one in eight participants have reduced company stock holdings since the Enron disaster. Only one in four said they felt less comfortable about their company stock holdings.
The average 401(k) participant had 30% of his or her assets invested in company stock, according to Boston Research Group. In addition, one-third said more than 50% of their assets were held in company stock.
Less Risky Than Bonds?
Another interesting aspect of the survey is how participants viewed the relative risk of their own company stock. Half of the participants said company stock was either as risky or less risky than a money market fund, while one-third said the stock was as risky or less risky than government bonds.
"We've seen this constantly. Participants do not have a clear understanding of the nature of investment risk," said Warren Cormier, president of Boston Research Group.
Poor education programs may be one reason why employees do not seem to be worried about their 401(k) asset holdings.
"There are a lot of communication programs that are [offered] by corporations," said Mike Scarborough, CEO of The Scarborough Group, an investment advisory firm for defined contribution savings plan participants based in Annapolis, Md. However, they are not truly helpful, Scarborough said. "They are not true education programs because to educate people [about diversification] is not going to happen in an hour or two."
However, corporations are not the only ones to blame, he continued. Many investors are uninterested in or intimidated by the idea of taking care of their retirement finances - even those who do have access to advice.
"The corporations, in some respects, are simply speaking to a brick wall, and while there may be some education for employees, this is not their bag of tricks," Scarborough said.
"There is the vast majority who do not want to be educated, do not find this to be enjoyable, do not have the time, do not have the proclivity and would prefer that we acquiesce this responsibility to someone else."
Scarborough said many people, unfortunately, will just sit back and wait for the next Enron to happen. "Many people look at Enron and say, Well that couldn't be my company,'" he said.
Adds Cormier: "I'm not sure there is a solution. Once the investment decision [was put] on a self-directed basis, the 401(k) world set themselves up for this type of outcome, by trying to educate millions of Americans, and not only educate, but get them to alter their behavior and that's an extraordinary process to do."