When Company Loyalty Goes Too Far
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When Company Loyalty Goes Too Far
Owning a stake in your company is a great idea—when your company is doing well. In fact, if you acquire stock when your company is still small, the returns can be astronomical. Also, instead of just being an employee, you’re an owner, too. You have a personal stake in the company’s growth and success.
Things To Know
- Employers can no longer direct more than 10% of their employees’ retirement-plan contributions into company stock.
Heed the examples of companies past
But don’t bet on becoming a millionaire with your company’s stock. Bubbles burst. Just look at what happened to so many dot-com companies in 2000. Start-up companies with no profits aren’t the only ones that are vulnerable. In the last 20 years, history has provided plenty of examples:
Take IBM (IBM) after the stock-market crash in 1987. Employees saw the value of their shares drop by two thirds. A lot of dreams—like sending children to college and retiring early—went up in smoke. Then there was Microsoft (MSFT) in 2000. The stock dropped from about $120 to under $50 at one point. General Electric went from $57 in 2000 to under $8 in 2018. Employees who failed to diversify their Microsoft-laden portfolios were wishing they had.
Finally, there’s the story of the former employees of Color Tile. Not only did they lose their jobs when the company filed for bankruptcy in 1991, but because the company had funneled employees’ retirement savings into Color Tile stock, a sizable portion of their retirement portfolios evaporated when their jobs disappeared.
Uncle Sam will protect you ... to an extent
As part of the 1997 Taxpayer Relief Act, employers can no longer direct more than 10% of their employees’ retirement plan contributions into company stock, as Color Tile did. But investors are still free to invest in the company stock without limit, and employers aren’t restricted from matching employee contributions with company stock.
Simply put, overinvesting in your company’s stock puts more of your financial eggs in one basket. Your employer’s fortunes already dominate your present financial security. (Unless you’re lucky enough to have a trust fund, it’s pretty likely that you’re relying almost exclusively on your employer for your current income.) Be careful about letting them dominate your future goals, too.