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The Law and Economics of Company Stock in 401(k) Plans

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Author Info

  • Benartzi, Shlomo
  • Thaler, Richard H
  • Utkus, Stephen P
  • Sunstein, Cass R

Abstract

Some 11 million participants in 401(k) plans invest more than 20 percent of their retirement savings in their employer's stock. Yet investing in the stock of one's employer is risky: single securities are riskier than diversified portfolios, and an employee's human capital typically is positively correlated with the company's performance. In the worst-case scenario, workers can lose their jobs and much of their retirement wealth simultaneously. For workers who expect to work for a company for many years, a dollar of company stock can be valued at less than 50 cents after accounting for risk. However, employees still invest voluntarily in their employer's stock, and many employers insist on making matching contributions in stock. We provide evidence that employees underestimate the risk of owning company stock, while employers overestimate the benefits associated with employee stock ownership. We then analyze the likely effects of current and proposed regulations in this context.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 50 (2007)
Issue (Month): 1 (February)
Pages: 45-79

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Handle: RePEc:ucp:jlawec:y:2007:v:50:i:1:p:45-79

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Thomas Rapp & Nicolas Aubert, 2011. "Bank Employee Incentives and Stock Purchase Plans Participation," Journal of Financial Services Research, Springer, vol. 40(3), pages 185-203, December.
  2. James Choi & David Laibson & Brigitte Madrian, 2008. "The Flypaper Effect in Individual Investor Asset Allocation," Yale School of Management Working Papers amz2560, Yale School of Management.
  3. Djaoudath Alidou, 2011. "Les augmentations de capital réservées aux salariés en France - Employee Equity Issue:Evidence from France," Working Papers FARGO 1110603, Université de Bourgogne - Crego EA 7317/Fargo (Research center in Finance,organizational ARchitecture and GOvernance).
  4. Laibson, David I. & Madrian, Brigitte & Choi, James J., 2009. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect," Scholarly Articles 4686774, Harvard University Department of Economics.
  5. Schnellenbach, Jan, 2012. "Nudges and norms: On the political economy of soft paternalism," European Journal of Political Economy, Elsevier, vol. 28(2), pages 266-277.

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