The DUFF TORNEY Team

Michael Torney, CFP, J.D., LL.M. 

It’s not unusual for corporate executives to have a lot of their wealth tied to the success of their employer. Not only do they earn a paycheck from their employer, but some executives of public or private companies may receive stock options, restricted stock grants, 401(k) match and other compensation that may depend on the company’s economic well-being and growth. As a result, an executive’s net worth can be significantly impacted if their company begins to underperform, such as a public company’s stock price declining, or a private business valuation drops. 

Silicon Valley Bank (SVB) is a recent example of how financial disaster can strike. As of March 8, 2023, each share of SVB’s stock was valued at $284.83. After the company announced it needed to raise capital to shore up in its balance sheet, prompting further withdrawals from customers, the stock had plummeted by 60 percent the next day. Regulators soon took over and the stock was nearly worthless shortly thereafter.  

It was difficult for an outside observer, and even for an inside executive, to foresee the financial collapse of SVB.  Prior to the collapse, the bank held the dominant position for lending in the venture capital community. It had a good reputation with its customers, a steady stream of new business, and little competition. SVB is one of many examples of a company that seems to be in good shape that later fails. When the failure occurs, it can be swift and there is rarely enough time to reduce your risk exposure.   

To avoid such a scenario, a rule of thumb (a note on “rules of thumb” later) is to keep 10 percent or less of all assets in company stock. This idea becomes more important for people near retirement. For those with a high tolerance for risk and are willing to accept losses in the case of a significant drop in their company’s stock, I generally recommend no more than 20 percent of assets should be held in company stock. 

To achieve these goals, executives should monitor their investments closely. There are no restrictions on the amount of 401(k) assets that can be held in company stock in 401(k) retirement plans. And many employer-matched contributions often come in the form of company stock, further concentrating holdings in employer stock. Add stock compensation programs into the mix and it’s easy for an executive’s net worth to represent over 10% of investable net worth. 

To reduce single-company stock risk, one strategy is to diversify your investments. Instead of a heavy concentration of wealth in one company, consider moving some of this money into a combination of U.S. and international stock funds, as well as bond funds, available in your 401(k) plan. 

Below are some key considerations for employees with company stock: 

• Determine your total exposure to company stock. Include stock options, restricted stock units, pension plans, employee-directed stock purchases and company matches in your total. There may be additional exposure to your company’s stock through mutual funds in which your company is part of the investment mix. If your company stock holdings exceed 10 percent of the value of your total investment portfolio, consider redistributing your assets across a broader spectrum of investment. 
• Know the restrictions, if any, on buying and selling company stock. The more your portfolio is tied up in company stock with restrictions, the more risk you incur. 
• Attempt to evaluate the level of risk your company’s stock carries. Employees whose company stock is subject to significant volatility should be particularly wary of investing too large a percentage of their investments in company stock. 
• Read news stories and information from outside sources to evaluate the short and long-term prospects of your company’s stock performance. Don’t rely solely on information from your employer on the company’s performance and outlook. 
• Maintain reasonable expectations of the performance of your company’s stock. Even if your company has performed well over a long period, it’s rare for a company to continually grow without an occasional downturn.  It’s also rare for market leading companies to hold that position indefinitely.  GE is a good example.  It’s easier to see changes in market dynamics with hindsight than it is to predict in advance. 
• Learn about the tax ramifications of selling company stock in each of the plans where it is held.  The rules of each plan will dictate the best time to sell company stock from a tax perspective.  A well-thought-out plan will weigh the optimal tax strategy against the investment risks. 

If you own significant company stock and would like to discuss how you can become more diversified, contact our team at Duffteam@monetagroup.com. We offer a free consultation and can focus on how to protect your wealth as part of an overall financial strategy.

© 2024 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. 

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