| NEW YORK
NEW YORK May 15 Buying stock that then falls
sharply is painful, especially for investors who also happen to
be company employees.
Some workers at Chesapeake Energy are experiencing
that pain now.
Overall, 38 percent of Chesapeake Energy's Savings &
Incentive Stock Bonus Plan - the only 401(k) plan available to
the majority of the firm's employees - is in company stock, far
above the 10 percent many plan consultants advise.
Chesapeake stock, hit by revelations about Chief Executive
Aubrey K. McClendon's business dealings, had fallen nearly 40
percent from highs of $25.58 in March to Monday's close. The
shares were down another 7 percent in Tuesday afternoon trading
Even after scandals at Enron and MCI WorldCom derailed the
retirement plans of employees who had large stakes of their
assets invested in company stock, U.S. workers continue to put
their retirement money into the same places where they draw
Financial advisers say employees like to invest in their
employers for several reasons, including loyalty, hopes to
profit from their work and a sense that they have a better read
on the company than ordinary investors. But many advisers say
that the practice increases the risk of losing your job and your
retirement savings at the same time if your employer fails.
We spoke with David Kudla, the CEO and chief investment
strategist at Grand Blanc, Michigan-based Mainstay Capital
Management, about loading up on company stock.
Q: How popular is it for your clients to invest in company
stock in their 401(k) plans?
A: We don't see it as often as we used to. There are a lot
of companies that, for fiduciary reasons, have taken the option
of company stock out of plans. What's happened to almost every
company I know of that had a bunch of company stock in their
plan (is that) a bunch of lawyers got together when it went down
40 percent or more and filed a class action lawsuit. That said,
we still do see clients with 50 to 100 percent of their assets
in company stock.
Q: What should be considered too much when it comes to
A: We need to get that position to be less than 10 percent
of the portfolio. If the company is growing and doing well, 5 to
10 percent could be fine -- as long as it's part of a portfolio
with broadly diversified mutual funds. But if the company is
under financial distress, then it should be closer to none.
Q: Say a client comes in with 50 percent of assets in the
shares of company where he or she works. What's your process?
A: Let's take Ford as an example. People came to us
with a considerable amount of Ford stock in their portfolios in
the fourth quarter. We specifically didn't sell it aggressively
and instead said: "Let's let the price improve a little bit."
We use what we call value averaging, which is essentially
looking for intermediate tops in the stock as chances to sell.
Not that we can call all of them. But people who came in with
Ford at $9 were able to wait and sell it for $12 a few months
later. We think it's important to get out of the position in
weeks or months, not days.
Q: What kind of pushback do you get from clients?
A: Many of them feel like their company is the one
investment they know pretty well. For some people, they've used
their 401(k) for years as a trading vehicle. They've been doing
things like going in and out of the company stock fund, selling
on a Friday and buying it again on Monday. Their thought is that
if you're doing it in a 401(k), not only are you not paying
capital gains but you're doing it commission-free.
If we're managing that account, then they're coming to us to
take over. If all you want to do is trade your company stock,
then you don't need us. We don't want any part of that. We want
to build to build diversified, long-term portfolios that will
(Reporting By David Randall; Editing by Lauren Young, Lisa Von
Ahn and Tim Dobbyn)