How to Balance Your Company’s Stock In Your 401k Plan

The 401k plan is emerging as a highly popular means of retirement planning. It is an investment where employees in the private sector can contribute a part of their earnings towards investment in stocks, bonds or money markets. This money and the interest earned are exempted from taxes until their withdrawal at the age of 59. However, in order to make your investment grow in a 401k plan, it is important that you don’t invest all of it in your company’s stocks. The Enron debacle is a prime example of how employees who invested huge sums in their company stocks suffered massive losses. Here are a few steps to help you balance your company’s stock in your 401k plan.

Instructions

Difficulty: Moderately Easy

1. Check whether your employer contributes to your 401k plan. Several employers contribute a matching amount of your contribution either in cash or stock. If your employer matches it in the form of the company stock, you have little choice but to accept it.
2. Don't put in all your money in one basket just because it is doing well. If the stock crashes you will lose everything. Diversifying helps because if a particular stock slides, another well-performing stock will even out the losses. Ideally, you should not invest more than 20 to 25 percent in a single stock option including that of your company.
3. Consider investing in other companies if you've already invested in your company stock independent of your 401k.
4. Know the basic precautions and treat your company stock like any other stock option. Analyze its financial condition before you invest. You should keep a close eye on the annual report and quarterly report. These should give you some sense of how much should you invest in your own company.
5. Check analyst reports if you're not sure about the stability of a stock investment. Analysts usually give a fair idea about any company’s standing.
6. Consult a financial advisor to help you with your investment in the company stock. While company officials may paint a pretty picture, a third party analyst might be able to offer you an insight or two.
7. Take into account the tax benefits of investing in your company stock. If you choose to withdraw your company stock after retirement, you will pay taxes only on the cost of the stock during the time of acquisition.

Tips & Warnings

• Invest in a 401k in a phased manner. The younger you are, the more aggressive you can be. As you inch closer to retirement, adopt a conservative approach. Start with a bigger focus on large cap stocks and as you age concentrate more on bonds and less on large cap stocks.
• Beware of investing too heavily in company stocks if your employer has restrictions on its sale. Otherwise, you may find yourself with no chance of cutting losses in the event of a slide.