This concentration in employers' stock leads employees' and retirees' portfolios very closely to a single stock, undiversified account. The perils of this overconcentration in single stock are that a steep decline in the stock price or long-term underperformance can seriously damage the value of the retirees' pensions. Indeed, employees' nest eggs can virtually disappear if the employer, whose stock comprises the majority of the retirement account, files for bankruptcy or the company enters into a merger that depresses the stock price. Many employees have no choice and are even required to keep their investments in the company's stock until the employee reaches age 55. Companies' reasons for employees investing pension monies in company stock are varied.
Company stock is a valuable resource for low cost capital.
If the company issues treasury shares to employees directly, it bypasses the costs of buying on the open market, thereby conserving cash for other uses. Some companies prefer to have plans with a great concentration in their stock to allow management to vote those shares, thereby insulating the company from takeovers. Some employers perceive employees as more dedicated to the company if they also own shares. A weaker version of the bill was passed in 1997 as part of the Taxpayer Relief Act of 1997. Pension professionals seem to agree that regulation requiring diversification might be appropriate for plan participants who are close to retirement age because they have less time to rebuild their nest eggs if the company's financial profile turns sour.