Company Stock Outside of 401(k) Can Help With Financial Wellness

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 Stock

However, 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.