New IRS Rules Ease 401(k) Stock Sales

New rules approved this May by the Internal Revenue Service require 401(k) providers to offer participants at least three investment alternatives to company stock. Most plan providers do this anyway, but the new rules also address the common corporate policy of disallowing employees from selling or diversifying out of company stock except at certain times.

The new rules, which take effect immediately and apply to plan years beginning on or after January 1, 2011, require plans to allow company participants to exit out of company stock as quickly and easily as they can move out of other investments in the plan.

There was a time was when I typically saw an over-concentration in company stock in the portfolios of new clients. After all, the option of investing in company stock, often at much lower prices than other investment options, can seem like a bargain. And we are all prone to look through rose-colored glasses when it comes to evaluating the prospects of the company we work for.

Today, thanks to the lessons of the tech bubble and companies like Enron and Bear Stearns, I see less “company stock tunnel vision.” More investors understand that over-concentrating in one stock can be risky. In fact, a recent study by the Employee Benefits Research Institute (EBRI) shows that the share of 401(k) accounts invested in company stock has seen a steady decline since 1999, falling by nearly 1 percentage point to 9.7 percent by the end of 2008.

If you would like to discuss the allocation of your 401(k) plan, please feel free to contact me.

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