The Role of Company Stock in 401(K) Plans

The Enron situation has caused the retirement income policy community to focus increased attention on the desirability of current law and practices regarding company stock in 401(k) plans. Several proposals have been advanced to limit the exposure of 401(k) participants to company stock. I suggest that, contrary to conventional wisdom, the introduction of company stock into 401(k) plans is not simply more risk for no additional (expected) return. Rather, the introduction of this asset class into the 401(k) participant's portfolio may have beneficial influences via the differential asset allocation. I create a model to simulate the likely financial impact of prospectively eliminating company stock from 401(k) plans and find that average balances are expected to be between 4.0 and 7.8 percent larger if company stock is retained.