How to Balance Stock in Your 401k Plan

A 401k is a highly popular means of retirement planning. It is a plan whereby 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 thereof 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. Assess if your employer contributes to your 401k plan. Several employers contribute a matching amount of your contribution to your 401k, either in cash or stock. If your employer matches it in the form of your company’s stock, you have little choice but to accept it. If the employer does not contribute at all (or in the form of stock), you have your options open.
2. Diversify. That’s the golden rule of any investment. If you’ve put in all your money in your company stock just because it is doing well, remember that the tide could change anytime. If the stock crashes, you will lose everything. On the contrary, 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. If you already have invested in your company stock independent of your 401k, it makes sense to invest in other companies.
4. Your company stock is like any other stock option. Know the basic precautions well. Analyze its financial condition before you invest. Is it financially stable? What are the prospects? What do the company stock trends suggest? Learn more. Keep an eye on the annual report and quarterly report. These should give you some sense of how much you should invest in your own company.
5. Check analyst reports. 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 will be able to offer you a telling insight or two.
7. Take into account the tax benefits of investing in your company stock. Upon retirement, if you choose to withdraw your company stock, 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.