You work for a company you’re really proud of. And the company is doing REALLY well! The best part is, your company offers one of several types of employee stock plans designed to help you acquire company stock – including Employee Stock Ownership Plans (ESOP), Employee Stock Purchasing Plans (ESPP), or Employee Stock Options (ESO). With these plans, you have the ability to participate in the success of the company through acquired equity.
Yet, questions still remain:
- Should I participate in employee stock plans?
- How much company stock is too much?
- If I really do own too much, what should I do?
Have you ever asked yourself any of these questions? You’ve come to the right place. I’ll break down the myths and best practices associated with employee stock plan participation here:
Should You Participate in Employee Stock Plans?
If you work for a great company, especially one you believe in, you should absolutely participate in an employee stock plan. But this comes with a caveat: you can and should take advantage of these benefits, but you should also be mindful of how much of your overall “investment dollars” are in your company’s stock.
We’ve all heard about diversification, or distributing our investment dollars out across a wide variety of investments. Hopefully you practice diversification when it comes to your investments. But have you considered your diversification strategy when it comes to your overall investment in your company?
Many employees are invested in their company much more than they realize. They often receive a salary, health insurance benefits, disability, and life insurance benefits, access to a 401k, 401k matching, ESOP, stock options, profit sharing, and other key benefits from your employer. You may even have other benefits like workout facility access, and hotel, entertainment, and restaurant discounts, child care, tuition reimbursement, paid vacation, etc. Long story short, you are more than likely highly “invested” in your company.
When we think about people losing their job or working for a company that has fallen on hard times, we first think about those people may lose their income. In many cases though, that’s just the tip of the iceberg.
An Example: Enron
Remember Enron? Many people think that could never happen again, or, that they work for a good company and that could never happen. Are you willing to roll the dice and take that gamble?
I’m sure you recall the devastating stories about Enron employees who lost their life savings because most of their investments were tied up in company stock. But let’s go deeper: think about the fact that they not only lost their savings, but they lost their current income, their health insurance, and probably a host of other employee benefits too.
Don’t get me wrong. Many people believe in what their company is doing and believe that investing in company stock is a great way to participate in their company’s success. I agree. You should work for a company you believe in! But you should also be cautious. Pay attention to how much you are really “invested” in your company. It may not be as simple as determining where your investment dollars are allocated. You may be more ‘invested’ than you thought!
So to stay on top of your investments in company stock, take the following steps:
- Take inventory: Ask yourself “Are you diversified? How much of your ‘investments’ are tied up in company stock?” A common rule of thumb is that you should have no more than 10-15% of your total “investment dollars” in your company’s stock.
- Act accordingly: If your answer is “No, I am not diversified enough,” consider selling some of the stock and investing the proceeds elsewhere. Talk to your HR department or seek out a trusted advisor that can help you answer this question. Most employee stock plans have provisions that allow participants to reduce their exposure to company stock at regular intervals.
- Don’t set it and forget it: Review your investments on a regular basis. Even if you decide to sell some stock, you will likely continue to receive more on a regular basis through your ESOP, 401k match and/or profit sharing plans. Remember: in many cases, you may have new company stock coming into the mix on a regular basis. You may need to consider having a plan to reduce exposure to keep your diversification in check.
Would you like more personalized guidance? Connect with me and we can create a customized strategy to help find a healthy financial balance.