Why Wells Fargo’s Misconduct Should Make You Think Twice About Sinking Investments in Your Company’s Stock
Many people think it makes sense to invest in shares of the company that they work for. Intuitively, it makes sense, since as a full time employee, you have a better grasp on the growth of the company and will be updated daily on its growth, new products and other important information. In fact, many companies offer special employee stock purchase plans where employees are able to buy shares at a discounted rate compared to the market price. This can make it extremely tempting, and many employees do purchase enormous amounts of stock in shares of the company that employs them for both their retirement accounts and personal accounts. But is this actually a good idea?
The percentage of companies offering employer stock as an investment option in a 401(k) has decreased in recent years but is still significant. According to human capital consulting firm Aon Hewitt, for all companies –public and private – the percentage offering employer stock was 34% last year, down 5% from 2013. However, among companies with publicly traded stock, the percentage is a whopping 63%.
Unfortunately, employees of Wells Fargo took the bait and loaded up on shares of their company’s stock. A recent investigation revealed that the company knew that its stock price was bloated and yet still did nothing to warn employees to reduce their share purchases. In the aftermath of the recent fraud case against the company, Wells Fargo’s stock price has plummeted 12%. This has left many investors in the red. For employees who own substantial amounts of shares, the losses are even more significant. Wells Fargo is not alone; similar proposed class action lawsuits have also been brought by employees of Whole Foods, BP, and RadioShack to name a few.
Think about what would happen to you and your family if you worked for Enron and decided to put all of your retirement savings into shares of Enron stock. Here is an excerpt from a New York Times article dated 2001:
The rapid decline of the Enron Corporation has devastated its employees’ retirement plan, which was heavy with company stock, and has infuriated workers, who were prohibited from changing their investments as the stock plunged.
Through the 401(k) retirement plan, employees chose to put much of their savings in Enron shares, and the company made contributions in company stock as well. But around the time Enron disclosed serious financial problems last month, the company froze the assets in the plan because of an administrative change. For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all — even though the plan had far less risky choices.
The unfortunate timing caps a year of pain for Enron’s workers. At the end of last year, the 401(k) plan had $2.1 billion in assets. More than half was invested in Enron, an energy conglomerate. Since then, the stock has lost 94 percent of its value.
At Portland General Electric, the Oregon utility acquired by Enron four years ago, some workers nearing retirement have lost hundreds of thousands of dollars. The utility has lined up grief counselors to help them work through their problems.
”We had some married couples who both worked who lost as much as $800,000 or $900,000,” said Steve Lacey, an emergency-repair dispatcher for Portland General. ”It pretty much wiped out every employee’s savings plan.”
The other dangerous issue that comes up when buying shares of the company you work for is insider trading. You can get in a lot of trouble if you trade stock in advance of public knowledge, where you would benefit from that knowledge to make huge gains or protect yourself from losses. As an insider and a full time employee at your company, you will have access to all kinds of information before the public, especially at executive levels. It can be very hard to keep track of what has been made public and what hasn’t. One wrong trade can get you in deep trouble with the SEC, a government agency that can impose large fines on you and even jail time.
The last problem with investing in your company’s stock is simple to understand: you have all of your eggs in one basket. If the company goes under, the value of your stock will plummet (possibly to 0) and your regular income is lost as your paychecks cease. This kind of financial hit can be devastating to recover from. With so many other investments to choose from, it’s just not worth the temptation to put all your investment dollars into a single company.