When I landed a job at the phone company early in my career, my Dad was thrilled. He saw it as a stable place I could stay until retirement. One of the benefits was a generous retirement plan that included a hefty percentage of company stock. Well, I didn’t stay at the phone company. But I did keep that company stock.

Then the phone company merged with another phone company, and eventually got bought out by AT&T. Having a chunk of AT&T stock in my retirement account looked pretty good. After all, it was blue chip stock with tip-top name recognition. So at first I left those shares in my portfolio. A few years later I was talking to a financial advisor.

My financial advisor pointed to my AT&T stock and shook his head. He reminded me about that well-worn adage about eggs in one basket. Ah, yes, a fundamental principle of investing that I learned during the first week of my MBA program. To be fair, I didn’t have all my eggs in one basket, but a portfolio built for retirement with more than 10% of any one stock is generally considered to be overly concentrated and therefore unnecessarily risky.

I heeded my financial advisor’s advice and rebalanced my portfolio, then watched as that AT&T stock swung wildly during the great recession. Now it’s just another a piece of my portfolio, and my phone company experience is on page two of my resume.

The egg problem

Even if you’re completely bought into the concept of a well-balanced portfolio, your company’s retirement plan could throw that balance out of whack. You may be tempted to keep all that stock out of loyalty to your employer, sentimentality, or a belief that the company has a great future.

Your feelings about the value of your company stock may not be wrong. It’s just that you don’t want to be overly reliant on one company’s success to the point that it determines what your retirement looks like. For example, if the company is stable but slow growing, your portfolio still might benefit from other investments that are more aggressive. On the other hand, if it’s a startup you’ll want to balance that out with more long-term investments. This is the kind of guidance your financial planner can give you.

Why so much stock?

Companies have a few reasons for providing benefits in the form of company stock, including a belief that employees with “skin in the game” will be motivated to work harder and stay longer. Leadership also might want to increase their leverage with shareholders, believing workers are more likely to support their decisions. And of course companies are usually saving money when they make matching contributions in the form of shares rather than cash.

One thing people often don’t consider is how diversification applies beyond your investment portfolio. If you have a high percentage of stock at the same company you’re working for, then both your current and future financial security is dependent on your employer. It’s unpleasant to think about your employer potentially going bankrupt, but if that should happen, you could be facing a situation in which you’d have to find another job and work another five or 10 years to re-fill your retirement account.

Just having company stock isn’t necessarily a reason for concern. But you’ll want to talk to your financial planner about the percentage any single stock takes up in your portfolio. If it’s more than the recommended 10%, they’ll help you make a plan to manage the holdings over time so you can become well diversified, or segregate these holdings so your retirement isn’t dependent on their performance.

If company stock is part of your retirement or compensation plan, talk to your Arrivity financial planner about making sure you’re not taking on unnecessary risk.

Things to think about if you receive equity compensation:

• If you’ve changed jobs to an employer that provides equity compensation in the form of RSUs (restricted stock units), stock options, or an employee stock purchase plan, it’s probably time to update your financial plan.
• If you’re planning on leaving your current employer or getting ready to retire, ask to speak to the retirement plan administrator so you understand your next steps.
• Before you exercise stock options or sell shares, consult your tax advisor so you understand the tax consequences of those transactions.
• Talk to your tax professional to determine if you may need to pay quarterly taxes to the IRS based on your RSU vesting.

Please contact us at 206.217.2583 or info@arrivity.com if we can assist you or someone you know with financial planning.

The foregoing content reflects the opinions of Liz Behlke and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.