401(k)s And Company Stock: How Can We Encourage Diversification?
Over the past two decades, the private pension system in the United States has shifted from defined benefit to defined contribution plans, and the fastest growing defined contribution plans are 401(k)s. The defining characteristic of 401(k) plans is that employees, rather than employers, bear the investment risk. Currently, many employees hold a significant portion of their 401(k) funds in their companies' stock, which increases the risk of their plans. This investment behavior contradicts standard asset allocation theory. Investing in one stock rather than a diversified portfolio creates more risk without providing any increase in expected returns. In addition, plan participants hold an asset whose value is closely correlated with their own earnings. Due to these two factors, financial experts generally advise against holding large shares of company stock in retirement accounts such as 401(k)s.
|Date of creation:||Jul 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/Email:
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:crr:issbrf:ib-9. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.