What’s the best argument against privatizing Social Security? The number of supposedly sophisticated corporations that encourage (or force) employees to invest their retirement funds in their own company’s stocks.
The single most basic tenet of intelligent investing is diversification: put your eggs in as many baskets as possible. Despite disasters at Enron, Worldcom, Bear Stearns, et al, however, corporations continue to thumb their noses at this simple rule, forcing employees to stake not only their short-term compensation on their company’s well-being, but their long-term savings as well.
Each time a company implodes, taking employees’ retirement funds down with it, the post-mortem analyses usually include a quote from a chagrined financial advisor pointing out that concentrated investing is risky. It’s time we went beyond that:
Investing employee retirement money in company stock is not just risky: It’s idiotic.
Fannie Mae’s senior managers have much of their compensation tied to FNM’s stock, and since they’re responsible for betting the company (and losing), they deserve what they get. These senior managers are also rich enough, however, that the losses don’t matter much.
Many of Fannie Mae’s rank-and-file employees, meanwhile–who had nothing to do with the company’s destroying itself–have now watched some of their retirement savings evaporate. This is the result not only to the boneheaded risks taken by senior management, but by the idiotic company decision to force some employees to keep some retirement money in Fannie Mae stock.
To Fannie Mae’s credit, it was smart enough to not invest employee 401ks in FNM stock, which many companies do. But Fannie prohibited those who bought into the company’s Employee Stock Ownership Plan from diversifying until they were 55 years old, and then only if they’d been buying stock for 10 years. ESOPs aren’t necessarily a bad idea–many employees want to buy their company’s stocks–but at companies that also pay part of an employee’s compensation in stock, as Fannie does, they can be extremely risky. And we imagine that many of those who bought into Fannie’s ESOP had no idea how much risk they were taking.
If corporations won’t voluntarily choose to get responsible and discourage employees from investing retirement funds in company stock, the government needs to prohibit it. There’s just too much at stake to allow irresponsible companies to continue to blow their employees up.
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