The Markets August 21, 2013

Company Stock Hurting the Bottom Line?

Research from Morningstar suggests holding significant amounts of employer stock in 401(k) plans is bad for companies’ bottom lines.
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The analysis found firms with employees who have higher allocations to employer stock in 401(k) plans have tended to underperform those without. Morningstar says this underperformance can primarily be attributed to two factors:

  • First, companies with higher allocations to employer stock in their 401(k) plans tend to have a market beta that is less 1.0, and therefore have underperformed given a positive equity-risk premium.
  • Second, these companies tend to have a large-cap tilt and sacrifice the small-cap premium.

The research found noted a slope of –7.5% for future annual relative market performance (as a percentage of 401(k) plan assets invested in employer securities) and an annual five-factor alpha of –1.8% over the entire period of the analysis (i.e., a company that has a 50% allocation to employer stock would have underperformed by 3.75% on an absolute basis and .90% on a risk-adjusted basis). Using 36-month rolling historical five-factor regressions, Morningstar noted an average underperformance for those companies with 40% or more invested in employer securities to be –2.05% and a five-factor alpha of –1.10%.

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“These findings contribute to the already strong argument against employees holding significant company stock allocations and reinforce our stance that employers should minimize (or even eliminate) participant investment in employer securities,” Morningstar said in its research report.

The report is here.

Data & Research August 21, 2013

Younger Employees Need More Attention

More attention needs to be paid to younger employees when it comes to investing for retirement, according to a new study from Hearts & Wallets, LLC.
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The study, “Inside Retirement Advice 2013: Accumulator Focus, Acquiring and Growing Relationships in the Workplace, Online and with Advice and Guidance,” found retirement services firms have traditionally targeted those between ages 35 and 44. When it comes to employees that are between 21 and 35 years old, “Three-quarters of firms agree that they need to do something different for younger investors,” said Chris J. Brown, principal, Hearts & Wallets.

According to the study, only 16% of resources are devoted by these firms to seeking out younger employees/investors. Similarly, only eight percent of firms operate with a focus towards this younger group.

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Because few of these younger employees are strongly planning for or interested in retirement, Brown said, retirement services firms need to “speak the language of younger investors.” Most of those surveyed for the study (90%) agree these younger employees “demand more immediate and varied ways to communicate, access and validate” plan-related information and that “the industry will have to adapt.”

Rather than the more traditional approaches of television advertisements and seminars, the study recommended firms look at more current avenues of communication such as social media, online ads, e-mail, Twitter and similar outlets.

The study also found that retirement services firms and plan sponsors need to be more thorough in the information contained within plan enrollment materials provided to employees. For example, in a review of 13 such enrollment kits, the study found:

  • More than one-third failed to mention employer matching contributions and tax deferral, both compelling reasons for plan participation;
  • Only 38% mentioned anything about Social Security; and
  • Fewer than one-third mentioned retirement income sources other than 401(k) or 403(b) plans, or included a rollover application or beneficiary designation form.

“There’s considerable room for improvement in how firms move Accumulators through choices at work, outside work and the overall advice/guidance experience,” said Brown, who pointed out new firms that address these improvements will force existing companies in the industry to change how they do business.

The study used the term “Accumulator” to describe those employees that are younger than age 64 and not within five years of retirement. This group makes up 77 million households with $15.4 trillion in investable assets, according to Hearts & Wallets research. More information on the study can be found here.

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