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January 18, 2002
Assessing the Risk in 401(k) Accounts
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But it can be done, according to The New York Times. The newspaper points to an analysis done by RiskMetrics, a software analytics company in New York. Using the past performance of the 30 stocks in the Dow Jones industrial average, the firm recently estimated how much risk a worker would be assuming in his retirement account if it contained varying stakes in his company's shares.
For instance, a worker at Microsoft who has one-third of his 401(k) in Microsoft shares and the remainder in an index fund that mirrors the overall stock market would be assuming almost 30 percent more risk than he'd have in the index fund alone.
If the Microsoft employee had only 10 percent of his portfolio in the company's stock, however, his risk would be only 12 percent greater than the overall market's, according to the Times.
In recent years, Microsoft stock has been the dominant holding in the company's 401(k). According to the most recent figures available, a little over a year ago Microsoft shares made up 46 percent of the company's 401(k) plan. Employees with that much Microsoft stock, RiskMetrics said, have nearly 40 percent more risk than the market.
With Hewlett-Packard, RiskMetrics found that a 30 percent holding by employees in a 401(k) would mean 42 percent more risk than in a stock index fund. According to the most recent figures available, 27 percent of the company's 401(k) plan assets were in the stock of Hewlett-Packard and its spin- off, Agilent Technologies.
When it comes to some companies, concentrated holdings in their stock holds little risk to workers. RiskMetrics found that even large holdings of four Dow stocks - Coca-Cola, Johnson & Johnson, Merck, and Procter & Gamble - would not produce much greater risk than a portfolio invested in the overall market.
But weighing all the 30 Dow stocks, a one- third holding in a 401(k) would produce, on average, 21 percent more risk than a portfolio that reflected the overall market. Given the greater volatility in Nasdaq stocks, similar holdings in those companies' shares would generate even greater risk.
The Times says this exercise illustrates how crucial it is that workers, especially those near retirement, be free to dump company shares to reduce risk in 401(k)'s.
"People need to be aware of the risk in their retirement portfolio and they need a vehicle to adjust any concentrated positions to diversify their risk," said Michael Thompson, global market commentator at RiskMetrics.
To read the New York Times article, click here. Registration required.
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