Primarily driven by their familiarity with the company that they work for, many investors in 401(k) plans are loaded up on company stock. Apparently the lessons of Enron and WorldCom have been lost on a large number of investors, the Associated Press reports.
In 2004, 12.5% of investors in 401(k)s had 50% or more of their assets invested in company stock, according to the Profit Sharing/401(k) Council of America. While that's down from 20% in 1999, it's still too high an exposure due to the risk of a single stock falling in value, according to the organization.
"Familiarity tends to breed complacency," said Christopher Jones, CIO at Financial Engines. "Employees feel more comfortable with the stock because they know the mangers [and] the CEO. But unlike a mutual fund, individual companies can go bankrupt, like Enron, WorldCom and Global Crossing."
He recommends that an employee place no more than 20% of their holdings in their employer's stock, and consider an even lower threshold of 5% to 10% if the company specializes in only one sector or offers few products. On the other hand, a widely diversified company like GE is "kind of like a mini mutual fund" and, therefore, presents less risk, he said.