Jon Corzine and Ted Kennedy want to save us from our greedy selves. The multimillionaire U.S. Senators are backing legislation that would prevent you from concentrating your 401(k) assets in your company's stock. The average American invests nearly 30% of his retirement account in his employer's shares. This federalized portfolio management has its genesis in the Enron disaster, in which thousands had their retirement savings devastated when the stock dropped from 80 bucks to 80 cents as fast as you can say, "I take the Fifth." And Enron was preceded by a few lesser disasters.
Employees at Procter & Gamble and Coca-Cola, for example, had 80% or more of their retirement wealth in those stocks before they tanked. Corzine, Kennedy and others want to make sure such wipeouts will not befall others. Democratic Senators are pushing a pension-reform plan that would prevent you from buying your company's stock for your 401(k) if the company also contributes stock. You could buy, or it could contribute, but not both, unless there's a separate, traditional pension offered.
Corzine initially wanted to place a 20% cap on company shares, but gave way to Kennedy's less specific limitation. Their bill also would take the locks off your account, allowing you to sell your employer's shares after three years, and would allow the company to provide independent investing counseling for you.
This all sounds reasonable, and it's wise for most workers to limit their exposure to their employer's stock. A diversified portfolio will help protect them if the company goes bust. But there are problems with the Senate proposal--and not just because the government has no business micromanaging your portfolio.
There may be good reasons to load up your 401(k) with company shares. After all, stock-picking gurus Warren Buffett and Peter Lynch have always counseled to buy what you know. You probably know more about your outfit's prospects than those of any other company--whether it's developing hot new products, for instance. It's one stock with which you might have an edge.
And isn't a guy like Corzine preventing us from becoming as rich as he is? A lot of people got wealthy betting heavily on their employer. Corzine, the former co-CEO of investment bank Goldman Sachs, made his pile primarily from shares of Goldman's privately held stock, which gave him the $60 million he spent on a pricey piece of furniture--a U.S. Senate seat.
Andrew Carnegie was another poster boy for nondiversification. He advised putting all your eggs in one basket--"then watch that basket." Carnegie's eggs were made of steel. Fast-forward to today, when average workers have become rich at Microsoft and Dell by loading up on their employers' stock (thus the Dellionaires). Bill Gates' portfolio is still overwhelmingly Microsoft. Bad planning, Bill. And how about the folks who retire from Wal-Mart and can shop at Tiffany because they bought Sam Walton's stock on the cheap? One stock. One company.