Company Stock in Pension Plans: How Costly Is It?

Lisa Meulbroek


Employees often hold substantial levels of company stock in their defined
contribution pension plans, a practice widely-recognized as risky but nonetheless
common in high-tech firms and blue-chips alike. While one might reason that
employees willing to take on the increased risk should do so, holding company
stock is inefficient for all employees, even risk tolerant ones. This paper
investigates the extent of company stock ownership with defined contribution
pension plans and estimates its cost, finding that employee investors sacrifice
an average 42% of their company stock’s market value by taking on risk that
could otherwise have been “diversed away”. Significant losses occur even
at levels of company stock ownership that fall within the newly-proposed
legislative limits. By matching with cash rather than stock, firms could reduce
that lost value, making both employees and the firm better off. Risk tolerant
employees who want to “swing for the fences” should instead diversify their
portfolios and lever them to the desired risk levels. The findings in this paper
call into question the wisdom of requiring or allowing company stock holding
within retirement plans.

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