If your employer hits a rough patch, the same bad news can cost you your job and sink its stock. That makes a big stake in it riskier than the same amount in a similar company you don’t work for. Keep company stock to 10% of your investments or less, and sell new shares on a fixed schedule.
At the end of 2000, Enron’s 401(k) plan held $2.1 billion, 62% of it in Enron stock at $83 a share. When Enron filed for bankruptcy in December 2001, thousands of its employees lost their jobs and much of their retirement money together.
Your employer doesn’t have to resemble Enron to put your job and savings at risk together. The weak results that drag down a share price are often the same ones that bring layoffs.
Company stock piles up on its own through stock grants called restricted stock units (RSUs), an employee stock purchase plan, options, and the 401(k) stock fund. Three habits keep it there: loyalty, waiting for the price to climb back to a high you remember, and the sense that knowing the company makes its stock safer. It doesn’t.
Treat 10% as a ceiling, not a target. T. Rowe Price says any single stock over 5% of a portfolio deserves a closer look, company stock especially, and a stake over 10% usually needs a plan to cut it soon.
A fixed selling schedule gets around those habits because you decide only once. Sell RSUs as they vest. They’re taxed as wages at that day’s value, so an immediate sale adds little or no tax. Trim older shares by a fixed amount each quarter until you’re under the cap. A capital gains bill is a reason to sell in stages, not to keep holding.
If company stock in your 401(k) has grown a lot, ask a tax pro about net unrealized appreciation, a tax break on that growth, before you sell it or roll it over. If you empty the account in one tax year after leaving the job and take the shares out whole, only what the plan paid for them is taxed as income. The growth is taxed as a long-term capital gain when you sell. An IRA rollover gives that up.
Add up the company stock you own in every account and divide by your total investments. If that’s over 10%, put your first sale date on the calendar this week.
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