Company stock in pension plans
Subtitle: how costly is it?
By: Lisa Meulbroek
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 02-058; Working paper (Harvard Business School. Division of Research) -- 02-058
Publisher: Division of Research, Harvard Business School
Published: 2002
Place of publication: Boston
Language: eng
Number of pages: 48
Description: The high-profile collapse of Enron has focused attention on just how much employees stand to lose when they invest retirement savings in company stock. Despite the apparent risks, employee ownership of company stock in defined-contribution pension plans is widespread, and Benartzi and Thaler (2001) find that employees inadequately diversify their investments in such plans, even when free to do so. Viewed after the fact, Enron employees clearly incurred a substantial cost by failing to diversify. But their strategy was costly before the event as well. All employees who hold company stock incur a substantial cost simply by owning that stock, a cost that stems from the type or risk exposure generated by lack of diversification. Company stock holdings expose employees to firm-specific risk that might otherwise have been "diversified away." Despite their higher risk exposure, employee investors earn exactly the same return as do fully-diversified investors, an imbalance that makes holding company stock inefficient for all employees, irrespective of their risk tolerance. This paper investigates employees' investment allocations in their defined contribution pension plans, examining how much employees sacrifice by investing in company stock.
Notes: Includes bibliographical references.