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 By AARON LUCCHETTI Staff Reporter of THE WALL STREET JOURNAL 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 giant. 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 & 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 said. 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 strategy? 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."