Company Stock in Pension Plans: How Costly Is It?

Employees often hold substantial levels of company stock in their defined contribution pension plans, a practice widely recognized as risky. But holding company stock is not only risky, it is costly: employees who own company stock are not fully diversified, so expected returns on their portfolios are lower than equally risky, but fully diversified, portfolios. This paper investigates the costs of holding company stock and finds that the loss in diversification reduces the value of employees’ holdings significantly. Employees who invest one‐quarter of their assets in company stock sacrifice 42 percent of the stock’s market value relative to holding a well‐diversified equity portfolio. Significant losses can occur even at levels of company stock ownership that fall within newly proposed legislative limits.