This is a monthly column that discusses options for small business owners and participants in 401(k) Plans.
This month’s topic, Company Stock.
Ever since Enron, Color Tile, UAL, etc. there is a concern about the amount of company stock held in Employee Benefit Type plans.
Despite the high-profile exposure of these companies, statistics show that participants are still investing and are invested in their own company stock. Some participants who want to break up the percentages into small portions can’t because of the plan rules.
So See Where You Stand. Take assessment of your personal situation in terms of how much stock you have both inside the profit sharing environment and outside. Most planners give 10% or less as the acceptable level of investment in a company stock. Even at that level, you should be diligent in asking how solvent is the company? What are the financial reports and analysts telling you and the world about the company? How is the competition doing in comparison with the company? Has there been a lot of executive trading in the stock? Has the trading been to sell or to buy on a general basis.
Sell Outside Your Plan. The best way to begin to break down the percentages is to unload the after tax portion of the company stock that you own. It has been surveyed and documented that where a participant holds stock in the company in the profit sharing environment, they generally own shares outright in an after tax account as well. By selling these shares first, you avoid the issue of any restrictions that may be imposed on your profit sharing plan stocks. Make sure the sale is of long term holdings to take advantage of the lower tax brackets.
Sell Inside Your Plan. When it is possible, lower the amount of stock in the plan. If the company is on an upswing in the market, a wise move would be to deposit your monies in a money market and buy shares over a long time period. As the company stock slides, you then reverse the trend and sell the shares back into the money market until (hopefully) the company comes back on line.
Remember, keep the percentages of overall holdings low, buy into stock over long periods of time and start an organized sell off of the stock over time as the company news indicates lower earnings, executive sell offs, and competition starts to heat up.
The end result will hopefully be a success story you can tell your grandchildren as you enjoy the fruits of a wise investor.