Tough Sell: Lighten Up on Employer Stock



From Today's Wall Street Journal FUND TRACK feature found in the Money & Investing section:

<font size="+2">Tough Sell: Lighten Up on Employer Stock</font>
Despite the Scandals, Advisers Have Hard Time Getting Investors to Diversify Their Holdings

Before high-profile bankruptcy proceedings underscored the risk of
investing too much money in one stock, John Whelpton kept nearly all of
his portfolio in the shares of his employer, United Parcel Service Inc.

Since then, Mr. Whelpton has watched the news of numerous companies going
up in smoke, destroying thousands of retirement accounts. He has visited a
financial adviser who preached diversification. And he has grown nervous
about his own retirement finances amid a brutal bear market.

Yet today, Mr. Whelpton still holds about 95% of his investments in UPS.
"I still have brown blood," he says of his ties to the Atlanta shipping

While some employers encourage such investment loyalty on the part of
their workers, it is an invitation to a debacle in the minds of many
financial professionals. Most experts encourage investors to diversify
their retirement nest eggs by holding less than 20% -- and often less than
10% -- of their portfolio in their employers' stock.

Investing heavily in any one stock is risky on its own, but the strategy
is even more dangerous when investors put large portions of retirement
money in the same company that pays their weekly salary, bonus and
benefits. The meltdowns of Enron Corp., WorldCom Inc. and most recently
HealthSouth Corp. only reinforce the skittishness.

Quite simply, "it's not a prudent thing," says Michael Chasnoff, a
financial adviser in Cincinnati.

In March 2000, Mr. Whelpton, 52 years old, and his wife, Ann Garrison
Whelpton, visited Mr. Chasnoff to discuss their financial situation. The
November 1999 initial public offering of UPS, where Mr. Whelpton works as
an operations manager, had got the couple thinking about possible early
retirement, but they realized they would need a solid financial plan to
make that idea a reality.

Mr. Chasnoff took one look at the Whelptons' portfolio and suggested that
they sharply cut back their exposure to UPS stock.

"That was a shock for me," says Mr. Whelpton, who has worked at UPS for 27
years and has held internal company shares for 24 years. "I couldn't even
accept it intellectually."

Many investors organize their savings much like the Whelptons, especially
those working at large companies that often encourage their employees to
hold company stock. In retirement plans where company stock is offered,
about half had at least 25% of workers' account assets in company stock,
according to a soon-to-be-published study by newsletter DC Plan Investing.
And employees at 17% of the plans, including those at Procter &amp; Gamble
Co., Coca-Cola Co. and General Electric Co. had more than half of their
retirement-plan assets invested in company stock.

"The reasons people invest so heavily in company stock haven't gone away,"
says Lori Lucas, a defined-contribution consultant at Hewitt Associates, a
Lincolnshire, Ill., benefits-consulting firm.

Despite the strategy's well-publicized losses at companies that filed for
bankruptcy protection or suffered accounting scandals, many investors
remain sanguine about investing in their own company. It's "the
us-versus-them syndrome," says Ms. Lucas. "It happens to them, but our
company's not susceptible."

Investors also hold onto company stock because they worry that selling may
hinder a climb up the corporate ladder or lead to a big capital-gains tax
bill. In a March survey of Hewitt's 401(k) clients, employees had invested
23% of plan assets in company stock, about the same percentage as December
1999. During the same period, the allocation to the biggest stock-fund
category -- U.S. large-capitalization stocks -- dropped to 20% from 29%.

Vanguard Group, another large 401(k) services provider, saw a similar
reluctance in employees to part with their employers' stock. During 2002,
company stock represented 11% of the total new money contributed to
Vanguard retirement plans, down a percentage point from 1999, but up from
10% in 2001.

"In a world of uncertainty, there's a bias homeward," says Stephen P.
Utkus, a principal in Vanguard's Center for Retirement Research. "People
are still committed to their company, even though they're less committed
to the overall stock market."

But these days, heavy employee ownership of stock can also be a liability,
exposing companies to questions about whether they're doing enough to look
out for their employees' financial health. The danger is that employees
"aren't getting enough quality advice," says Marr Leisure, a financial
adviser in Costa Mesa, Calif. He points out, however, that concentrated
stock positions might make sense for investors with enough money outside
of their retirement plan to diversify their overall holdings.

Of course, many smaller companies don't even offer company stock as an
option in their retirement plans. And at larger companies, employees are
more likely to concentrate their assets in one stock when the employer
encourages the behavior by matching retirement-plan contributions in stock
and restricting sales, effectively preventing diversification.

Earlier this year, a joint congressional committee investigating Enron's
collapse released a report urging changes to discourage workers from
holding concentrated positions in employer stock. "The importance of
diversification of retirement savings cannot be overemphasized," the
committee said in its report. Any proposals to limit investors'
flexibility to choose company stock, however, could face an uphill battle
since policy makers want to continue encouraging savings.

UPS awards stock to its 40,000 managers as part of their performance-based
pay. It also has a program for all employees to purchase company shares at
a discount. But UPS limits company-stock ownership in its managers' 401(k)
to 20% of each account's balance, an effort to allow diversification while
aligning employees' financial goals with the company's, a spokeswoman

Meanwhile, the Whelptons have started to take action. Mr. Whelpton, who
holds most of his UPS shares outside his 401(k), couldn't bring himself to
diversify at first, despite Mr. Chasnoff's advice. "I was wrestling with
how to reverse my thinking of the past 25 years," he says.

In the next three years, Mr. Whelpton's UPS stock held up relatively well,
faring much better than the overall market. But the volatility in the
stock and its failure to hit optimistic initial stock-price targets set by
Wall Street analysts made Mr. Whelpton reconsider the wisdom of holding so
much of his retirement money in UPS shares. What if oil prices went up,
hurting UPS's bottom line? What if analysts and big investors turned
bearish on UPS, even if the company was pursuing the right long-term

Weighed down by such concerns, Mr. Whelpton told Mr. Chasnoff he was ready
to diversify. In March, he sold his first batch of UPS shares, reducing
them to 95% of his portfolio and buying stock and bond mutual funds with
the proceeds. But like many investors weaning themselves from their
company stock, Mr. Whelpton plans to sell over a long period -- 18 months
-- and he still plans to hold on to a good chunk of his UPS shares.

And how much is that? Mr. Whelpton says he initially agreed to bring his
allocation to UPS down to 20%, but Mr. Chasnoff has persuaded him that he
should eventually push it down to 10%. The true test will come, says Mr.
Chasnoff, if UPS stock enjoys a big rebound.

"Clients don't want to sell" a rising stock, says Mr. Chasnoff. "It's a
tug of war."


Poor Mr. Whelpton and his wife. They have been talked into the stockbrokers web of commissions.

Had I followed advise like that 13 years ago when I retired, I would be a poor man today! That is not to say that one should hold UPS stock exclusively but to be talked into chopping your portfolio to 10%, whew! what a car salesman Mr. Chasnoff must have been before becoming a stockbroker.

My commissions when I sell are about $30.00 per 1,000 shares. Not the cheapest out there but certainly quite reasonable. I do wonder what the Whelpton's have been talked into paying? I do not know if the availability is still there to sell Class A shares at no commision through the company but that's certainly not a bad deal. The only reason I never used it is the complex formula on the actual sale price. For my $30.00 I always know the results going into the transaction.

Please note that Andrew Carnegie once said "The way to become rich is to put all your eggs in one basket and then watch that basket." I think I would trust Mr. Carnegie far above Mr. Chasnoff!


rebound? The market has fallen by over 20% overall in the past few years but UPS has slowly gone up? whatever aaron.


UPS stock is actually down from it's IPO release but there have been moments to make money with this stock. Prior to the IPO, one would agree selling UPS was to some degree questionable but IMO since, this may not be the case. Unless UPS can change to make itself a more growth oriented company (and it's not impossible) I think the days of UPS making people multiple millionares may be somewhat limited if not over. That said I do believe at this time UPS is a solid, safe, longterm investment but an overnight sensation it will probably never be again. But as a Stockholder I hope I'm wrong and it goes through the roof!


After today (and I'm sure this will not be the last time!) I say again "Poor Mr. &amp; Mrs. Whelpton." If he followed the broker's advice he only participated with 10% of his assets in the run-up today.