401(k)s And Company Stock: How Can We Encourage Diversification?
Alicia Munnell and
Annika Sunden
Issues in Brief from Center for Retirement Research
Abstract:
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: 2002-07
New Economics Papers: this item is included in nep-lab
References: Add references at CitEc
Citations: View citations in EconPapers (6)
Downloads: (external link)
http://crr.bc.edu/briefs/401ks-and-company-stock-h ... age-diversification/
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:crr:issbrf:ib-9
Access Statistics for this paper
More papers in Issues in Brief from Center for Retirement Research Contact information at EDIRC.
Bibliographic data for series maintained by Amy Grzybowski (amy.grzybowski@bc.edu) and Christopher F Baum (baum@bc.edu).