Equity Compensation Plan Participants Could Be Holding Too Much Company Stock

To make sure employees’ investment are diversified, Marc McDonough, with Schwab Workplace Financial Solutions, suggests employees should be offered a financial wellness program to help them understand a range of financial issues, including how much of their net worth is tied to equity compensation and how to properly balance their overall portfolio.

According to a nationwide survey from Schwab Stock Plan Services of 1,000 equity compensation plan participants who receive stock options or restricted stock awards and/or participate in employee stock purchase plans (ESPPs), equity compensation accounts on average for nearly 30% of employees’ net worth.

Millennial employees have a greater share of their net worth in equity compensation than do their Gen X and Baby Boomer counterparts (42%, compared to 24% and 19%, respectively). Almost three-quarters (73%) of employees surveyed also own company stock outside of their equity compensation plan, and most (44%) in their workplace retirement plans.

Maintaining a high proportion of company stock may be a conscious choice, as 81% of employees say either they have rebalanced their investment accounts in the past 12 months (55%) or their account automatically rebalances itself (26%), and approximately two-thirds of them say they take their equity compensation or ESPP into account when rebalancing.

“Markets are uncertain, so participants should understand the risks of having too much of their net worth concentrated in company stock,” Marc McDonough, senior vice president, Schwab Workplace Financial Solutions, tells PLANADVISER. “Generally, our rule of thumb is to have no more than 10% to 20% of an investment portfolio in company stock, but everyone’s financial situation is unique. It’s important to identify how equity compensation fits into your overall plan and manage your portfolio accordingly, ideally with the help of a financial professional.”

Needing advice

To make sure employees’ investment are diversified, McDonough suggests plan sponsors should, at a minimum, ensure that education is available for their employees and they know where to go with questions. “People tend to look at their finances holistically. Plan sponsors should also consider offering their employees a financial wellness program that supports that holistic view. These programs are a great vehicle to help employees understand a range of financial issues, including how much of their net worth is tied to equity compensation and how to properly balance their overall portfolio,” he says.

Schwab’s survey found most respondents recognize the value of financial advice, but it also reveals contradictions between that recognition and their reported behavior. Three-quarters say they would be very or extremely confident in their ability to make the right decisions about their equity compensation if they had the help of a financial adviser, and yet employees are more likely to get advice on how to manage their equity compensation through independent research (37%) than from interacting with a financial adviser (24%) or asking their employer (16%).

Workplace financial wellness programs are another source of guidance that can help employees understand and effectively manage financial complexities, offering direction in areas like equity compensation, budgeting and debt. According to the survey, 61% of those who are offered such a program take advantage of it. Those who participate say their program is helpful in a number of areas including planning for retirement (90%), using equity compensation to reach financial goals (84%), investing skills (83%), balancing equity compensation with other investments (82%), and developing a financial plan (82%).

The survey suggests that employees who are offered a financial wellness program but elect not to use it might not fully understand the breadth of services this type of program can provide. Their top reasons for not availing themselves of this resource are believing they don’t need advice (40%) and focusing on more immediate financial issues, like debt (27%).

“One of the most beneficial aspects of such programs is helping workers to create a financial plan that can balance short- and long-term priorities and show them the next step forward. Plus, people with a financial plan tend to exhibit more positive saving and investing behaviors overall,” McDonough says.