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Data and Research September 20, 2017
Company Stock Outside of 401(k) Can Help With Financial Wellness
Employees say they use company stock acquired through their ESPP to help pay down debt, add to their retirement savings, finance real estate or home improvement projects, or simply set aside for a rainy day.
Reported by Rebecca Moore
Fewer employers are offering company stock in their 401(k) plans and fewer plan participants are investing in company stock, an analysis from Fidelity Investments finds.
The percentage of employees with company stock in their 401(k) has dropped by almost half, from 41% in 2005 to 23% in 2016. More than one in four employers (28%) still offered company stock through their 401(k) in 2016, dropping from 39% in 2005. Nine percent of employee 401(k) assets were in company stock in 2016, down from 16% in 2005.
Meghan Murphy, director, Thought Leadership at Fidelity, tells PLANSPONSOR many employers have been working to simplify the administration of their retirement plans, and some employers who were maintaining multiple retirement plans (from perhaps mergers/acquisitions) have worked to consolidate those plans so now they only need to offer a single company stock fund. In addition, she says, “Other employers have reduced/removed company stock offerings from their plans to decrease fiduciary risk and in some cases are giving their employees an alternate opportunity to purchase company stock via an ESPP.”
Murphy explains that decreased participant usage is likely due to plan administration changes seen since the implementation of Pension Protection Act (PPA). She says 94% of participants are in plans that use a target-date fund as the default investment option. “This automated default means fewer participants are making decisions regarding where to invest their assets. In fact, 68% of Millennials are 100% invested in a target-date fund. In addition, fewer employers are mandating that company match contributions be invested in company stock.
Alternative Way to Use Company StockHowever, a growing number of U.S. workers are taking advantage of their company’s employee stock purchase plan (ESPP) to purchase company stock, with the percentage of employees participating in their ESPP increasing to 28% in 2016, up from 23% in 2014. Because stock purchased through an ESPP is held outside of an employee’s 401(k), shares are more accessible and can be used to help address a variety of financial needs, Fidelity says. Employees say they use company stock acquired through their ESPP—which can often be purchased from their employers at a discount—to help pay down debt, add to their retirement savings, finance real estate or home improvement projects, or simply set aside for a rainy day.
Employees who participate in their company’s ESPP are three times more likely to sell company stock for emergency cash rather than take a loan from their 401(k), and more than half (52%) said it was “highly unlikely” they would tap their 401(k) if they needed cash.
Fidelity found that 83% of employees who participate in their company stock plan expect the value of their company’s stock to increase over the next few years. More than half of employees surveyed (52%) said they expect the value of their company’s stock to increase at a modest rate, and more than one in five (21%) employees expect the value to increase substantially in the next 24 months.
“Making company stock available to employees is a great way for companies to motivate their workforce and give workers a sense of ownership in their company, as well as help attract and retain talented individuals,” says Mark Haggerty, head of Stock Plan Services for Fidelity Investments. “However, employees should remember that their company’s stock, just like any other stock, should be part of a balanced and diversified investment portfolio, especially if it’s part of their 401(k).”