Employee stock plan - how much is too much?

[JLee]

Or is there no such thing?

I haven't put together a case study yet, but for reference I'm at $57,314 gross (salary) plus $13,200 rental income. I can "afford" it but it'll make building my safety net take a bit longer.

Right now I have 6% going to a Roth 401k (50% match) and I just max'd my ESP (NYSE: FIS), which I expected to be 15% of net. Well, I got my first post-change check today. Apparently it's 15% of gross, but pulled out of net income, or $712/month.  I get a 33% match (either stock or added to my check) after 12 months, so as of January 2016 I'll be getting $234.96/mo back for free (minus tax).

I have ~$6k in my company 401k and ~$24k in NH State Retirement (which I need to pull out and transfer somewhere else, as I no longer work there).  I don't have enough of a safety net to be comfortable right now, but since I've discovered MMM and decided to downsize, I expect that to grow quickly enough that I'm not worried about it.

It makes me nervous having ~$8500 annually going into one stock. I believe I can sell it at any time, but I am not sure of the impact on my employer match if I sell (i.e. I don't know if I just have to keep it for 12 months, or what). I can try to find out, though.  I'm also not sure I'm going to stay here for over a year, but if I don't I can sell (and if I do, it's 33% guaranteed return on the initial amount, plus/minus what it gains/loses in the meantime).

[BlueBeard]

I would see what restrictions you have for selling.  I get a 10% match at work and can sell immediately.  Pretty much a free 10% for me, some months maybe more than 10% sometimes less.
33% match sounds pretty nice.

[JLee]

I would see what restrictions you have for selling.  I get a 10% match at work and can sell immediately.  Pretty much a free 10% for me, some months maybe more than 10% sometimes less.
33% match sounds pretty nice.

I know my match is delayed by 12 months and I know there's no restriction on selling, but I am not sure if selling will cause my match to disappear. If I can sell immediately and still get a match 12 months later, that would be ideal. I'll check into that - thanks!

Edit: Hmm, I found this:

FIS matches stock purchased through the Employee Stock Purchase Plan one year after the employee contribution is made. Stock is matched at 33% or 50%, depending upon officer status and years of service. 
Money invested in the Employee Stock Purchase Plan can be withdrawn at any time.

So...it looks like I could sell at any point and still get the match a year later. That's great news- do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

[The_Crustache]

Ayyyyy a Former-FIS employee here, who has a little bit of money in the ESPP (I made much less than you, and got a different job before I was contributing for 12 months).

As far as your last question:

do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

It really depends on what you want. I've kept mine since I started contributing (April 2013) even after I quit, because the financial technology industry is here to stay, and will grow, as more and more people move to card payments. I think the guys who steer the FIS ship (at least when I was there) seem to have a pretty good handle on things. Since the company lies in between two huge industry sectors (Financial, and IT), it tends to more-or-less follow market trends, I've seen.

The benefit with an index fund is you might have less risk, in the long run.
But if you stick with the ESPP, you benefit from the 33% contributions... aka free money.... and THAT's huge.

[JLee]

Ayyyyy a Former-FIS employee here, who has a little bit of money in the ESPP (I made much less than you, and got a different job before I was contributing for 12 months).

As far as your last question:

do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

It really depends on what you want. I've kept mine since I started contributing (April 2013) even after I quit, because the financial technology industry is here to stay, and will grow, as more and more people move to card payments. I think the guys who steer the FIS ship (at least when I was there) seem to have a pretty good handle on things. Since the company lies in between two huge industry sectors (Financial, and IT), it tends to more-or-less follow market trends, I've seen.

The benefit with an index fund is you might have less risk, in the long run.
But if you stick with the ESPP, you benefit from the 33% contributions... aka free money.... and THAT's huge.

We still seem to be doing incredibly well. I am part of the Managed IT division (we were another company, purchased by FIS two years ago) and we're growing faster than we can staff people. When we first transitioned to FIS, I didn't make enough to want to do the stock plan. We've grown enough and I've moved up enough now that it is hard to turn down an effective 5% raise. :)

Maybe I'll take 50% out and put it in an index fund? Tough call.

[Dodge]

Or is there no such thing?

I haven't put together a case study yet, but for reference I'm at $57,314 gross (salary) plus $13,200 rental income. I can "afford" it but it'll make building my safety net take a bit longer.

Right now I have 6% going to a Roth 401k (50% match) and I just max'd my ESP (NYSE: FIS), which I expected to be 15% of net. Well, I got my first post-change check today. Apparently it's 15% of gross, but pulled out of net income, or $712/month.  I get a 33% match (either stock or added to my check) after 12 months, so as of January 2016 I'll be getting $234.96/mo back for free (minus tax).

I have ~$6k in my company 401k and ~$24k in NH State Retirement (which I need to pull out and transfer somewhere else, as I no longer work there).  I don't have enough of a safety net to be comfortable right now, but since I've discovered MMM and decided to downsize, I expect that to grow quickly enough that I'm not worried about it.

It makes me nervous having ~$8500 annually going into one stock. I believe I can sell it at any time, but I am not sure of the impact on my employer match if I sell (i.e. I don't know if I just have to keep it for 12 months, or what). I can try to find out, though.  I'm also not sure I'm going to stay here for over a year, but if I don't I can sell (and if I do, it's 33% guaranteed return on the initial amount, plus/minus what it gains/loses in the meantime).

1.  Roth 401k?  Why?  Normal 401k would be much better for someone in your tax bracket.

2.  The typical advice is to put in as much into your ESPP as you can, and sell immediately.  That way you get the match, without the risk.  If you can sell immediately and still get a match a year later, even though you no longer own the stock, that would be amazing.  But something tells me if you sell immediately, you won't get the match.  I'd double check that.

3.  Typically the ESPP plans are risk free, because you can sell immediately, and they give you the lower price of the day the give you the stock, or 6 months ago.  Does your ESPP work this way?  Or do you just get the stock at the current price?

4.  You are correct to be wary of contributing 20% of your take home pay towards a single stock.  Especially when that stock is your employer.  If they give you the lowest price backdated 6 months, and you can sell immediately, AND still get the match a year later, I'd go for it.

[Dodge]

Ayyyyy a Former-FIS employee here, who has a little bit of money in the ESPP (I made much less than you, and got a different job before I was contributing for 12 months).

As far as your last question:

do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

It really depends on what you want. I've kept mine since I started contributing (April 2013) even after I quit, because the financial technology industry is here to stay, and will grow, as more and more people move to card payments. I think the guys who steer the FIS ship (at least when I was there) seem to have a pretty good handle on things. Since the company lies in between two huge industry sectors (Financial, and IT), it tends to more-or-less follow market trends, I've seen.

The benefit with an index fund is you might have less risk, in the long run.
But if you stick with the ESPP, you benefit from the 33% contributions... aka free money.... and THAT's huge.

We still seem to be doing incredibly well. I am part of the Managed IT division (we were another company, purchased by FIS two years ago) and we're growing faster than we can staff people. When we first transitioned to FIS, I didn't make enough to want to do the stock plan. We've grown enough and I've moved up enough now that it is hard to turn down an effective 5% raise. :)

Maybe I'll take 50% out and put it in an index fund? Tough call.

Keeping a large amount of money in a single stock is bad enough, but when that single stock just happens to be the source of your paychecks (your employer), it's probably one of the worst investing decisions you can make.  If the company has trouble and you get fired, not only will you lose your paycheck, but your investments will likely drop significantly (right when you need it).  I've read many horror stories about this, like that secretary at Enron who had 2-3 million of her retirement (all of it) in company stock, and lost everything (and her job) when they went under.

Don't do it.

[BlueBeard]

So...it looks like I could sell at any point and still get the match a year later. That's great news- do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

That sounds pretty good, I would try and find out what fees etc you will be dealing with and when you pay tax if this is not a retirement plan. You may have to call the broker they use to find out, I did, HR was not helpful.

I pay tax on my 10% match immediately, yours might hit when you get the 33% match???  Basically its income.
In my plan I just sell the stock and then when tax season comes around fill out the forms just like a normal stock purchase gains/losses.  I forget the form number.
When I sell its deposited to my checking account, I then funnel to whatever investment I want.

[JLee]

I had thought Roth was a better option (new!), but I just changed it to traditional.

Ayyyyy a Former-FIS employee here, who has a little bit of money in the ESPP (I made much less than you, and got a different job before I was contributing for 12 months).

As far as your last question:

do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

It really depends on what you want. I've kept mine since I started contributing (April 2013) even after I quit, because the financial technology industry is here to stay, and will grow, as more and more people move to card payments. I think the guys who steer the FIS ship (at least when I was there) seem to have a pretty good handle on things. Since the company lies in between two huge industry sectors (Financial, and IT), it tends to more-or-less follow market trends, I've seen.

The benefit with an index fund is you might have less risk, in the long run.
But if you stick with the ESPP, you benefit from the 33% contributions... aka free money.... and THAT's huge.

We still seem to be doing incredibly well. I am part of the Managed IT division (we were another company, purchased by FIS two years ago) and we're growing faster than we can staff people. When we first transitioned to FIS, I didn't make enough to want to do the stock plan. We've grown enough and I've moved up enough now that it is hard to turn down an effective 5% raise. :)

Maybe I'll take 50% out and put it in an index fund? Tough call.

Keeping a large amount of money in a single stock is bad enough, but when that single stock just happens to be the source of your paychecks (your employer), it's probably one of the worst investing decisions you can make.  If the company has trouble and you get fired, not only will you lose your paycheck, but your investments will likely drop significantly (right when you need it).  I've read many horror stories about this, like that secretary at Enron who had 2-3 million of her retirement (all of it) in company stock, and lost everything (and her job) when they went under.

Don't do it.

I don't intend on keeping it here forever. You would forfeit a 33% return in order to prevent having ~$9k at any given time in a single stock?

So...it looks like I could sell at any point and still get the match a year later. That's great news- do you think I should try to sell and transfer it over to a Vanguard index fund, or keep it with Fidelity somewhere?  I am brand new to investing and have no idea what I am doing..

That sounds pretty good, I would try and find out what fees etc you will be dealing with and when you pay tax if this is not a retirement plan. You may have to call the broker they use to find out, I did, HR was not helpful.

I pay tax on my 10% match immediately, yours might hit when you get the 33% match???  Basically its income.
In my plan I just sell the stock and then when tax season comes around fill out the forms just like a normal stock purchase gains/losses.  I forget the form number.
When I sell its deposited to my checking account, I then funnel to whatever investment I want.

Mine will count as income when I get it. It's regular stock, not a retirement plan. I believe I sell at market price whenever I sell, but I would have to verify to be sure.

[Dodge]

While I still believe traditional 401k beats Roth 401k for someone in your position, I'd recommend against making changes to your accounts based on a single recommendation, with no reasoning to back it up (I didn't provide any), and without understanding the differences and potential consequences.  What if I'm an idiot?  And the next 15 people all say Roth is better? (doubt it) :-P

I was mostly responding to The_Crustache's post, which seemed to recommend keeping it there forever because it's a great company.  I'm not sure if I'd leave $9k there for the 33% match in a year.  Depends on how big a % of you portfolio that takes up, and how much you need the money.  I'm not sure there's a *right* answer for that one.

[megamomo]

Keeping a large amount of money in a single stock is bad enough, but when that single stock just happens to be the source of your paychecks (your employer), it's probably one of the worst investing decisions you can make.  If the company has trouble and you get fired, not only will you lose your paycheck, but your investments will likely drop significantly (right when you need it).  I've read many horror stories about this, like that secretary at Enron who had 2-3 million of her retirement (all of it) in company stock, and lost everything (and her job) when they went under.

Don't do it.

While no one here would recommend overloading in one stock, the advantages of ESPP (buy at a discount and/or get company match) are well worth it.  For many, they can buy at a discount of 10-15% and sell immediately, so it is a free 10-15%.  And when these plans use a "lookback window", the gains can be far, far more than 10-15%.  So the advice of simply not doing it at all does not seem sound to me.  The question of risk becomes how long you are willing to hold it.  Selling instantly is virtually no risk, but this likely means that any gains are taxed at your income rate (and you may not get any match).  Holding longer can shift those gains to long-term capital gains.  For my plan, I choose to invest the max which we get at a 15% discount based on a 2-year lookback window.  I then hold until the long-term gains period, which is 18 months (we purchase bi-annually).

With a 33% match at 1-year window, that sounds like a good deal.  So selling every year and keeping a rolling $8500 in the plan seems like a very nice plan.

[hodedofome]

Bill Gates was the CEO (who knew more than anyone how the company was going to do) of Microsoft and he's been selling his stock since the '90s. When he hired a real investment professional, they worked on diversifying his portfolio because almost all of his net worth was in MSFT stock. I would try to sell off the stock as you receive it and put it in index funds. Don't let it get more than 10-20% of your investments.

[Dodge]

Keeping a large amount of money in a single stock is bad enough, but when that single stock just happens to be the source of your paychecks (your employer), it's probably one of the worst investing decisions you can make.  If the company has trouble and you get fired, not only will you lose your paycheck, but your investments will likely drop significantly (right when you need it).  I've read many horror stories about this, like that secretary at Enron who had 2-3 million of her retirement (all of it) in company stock, and lost everything (and her job) when they went under.

Don't do it.

While no one here would recommend overloading in one stock, the advantages of ESPP (buy at a discount and/or get company match) are well worth it.  For many, they can buy at a discount of 10-15% and sell immediately, so it is a free 10-15%.  And when these plans use a "lookback window", the gains can be far, far more than 10-15%.  So the advice of simply not doing it at all does not seem sound to me.  The question of risk becomes how long you are willing to hold it.  Selling instantly is virtually no risk, but this likely means that any gains are taxed at your income rate (and you may not get any match).  Holding longer can shift those gains to long-term capital gains.  For my plan, I choose to invest the max which we get at a 15% discount based on a 2-year lookback window.  I then hold until the long-term gains period, which is 18 months (we purchase bi-annually).

With a 33% match at 1-year window, that sounds like a good deal.  So selling every year and keeping a rolling $8500 in the plan seems like a very nice plan.

Yes ESPPs are typically amazing plans, with no risk.  I was mostly responding to The_Crustache's post, which seemed to be recommending *not* selling immediately, and keeping it forever, because it's a great company.

[JLee]

While I still believe traditional 401k beats Roth 401k for someone in your position, I'd recommend against making changes to your accounts based on a single recommendation, with no reasoning to back it up (I didn't provide any), and without understanding the differences and potential consequences.  What if I'm an idiot?  And the next 15 people all say Roth is better? (doubt it) :-P

I was mostly responding to The_Crustache's post, which seemed to recommend keeping it there forever because it's a great company.  I'm not sure if I'd leave $9k there for the 33% match in a year.  Depends on how big a % of you portfolio that takes up, and how much you need the money.  I'm not sure there's a *right* answer for that one.

Meh, then I'll change it back. There's only $6k in there now anyway and it's growing pretty slowly. I'm not maxing my 401k so there's not a whole lot going in there (maximized employer match and stopped).

Keeping a large amount of money in a single stock is bad enough, but when that single stock just happens to be the source of your paychecks (your employer), it's probably one of the worst investing decisions you can make.  If the company has trouble and you get fired, not only will you lose your paycheck, but your investments will likely drop significantly (right when you need it).  I've read many horror stories about this, like that secretary at Enron who had 2-3 million of her retirement (all of it) in company stock, and lost everything (and her job) when they went under.

Don't do it.

While no one here would recommend overloading in one stock, the advantages of ESPP (buy at a discount and/or get company match) are well worth it.  For many, they can buy at a discount of 10-15% and sell immediately, so it is a free 10-15%.  And when these plans use a "lookback window", the gains can be far, far more than 10-15%.  So the advice of simply not doing it at all does not seem sound to me.  The question of risk becomes how long you are willing to hold it.  Selling instantly is virtually no risk, but this likely means that any gains are taxed at your income rate (and you may not get any match).  Holding longer can shift those gains to long-term capital gains.  For my plan, I choose to invest the max which we get at a 15% discount based on a 2-year lookback window.  I then hold until the long-term gains period, which is 18 months (we purchase bi-annually).

With a 33% match at 1-year window, that sounds like a good deal.  So selling every year and keeping a rolling $8500 in the plan seems like a very nice plan.

Our match is based on the price we paid when we bought it, so I can forecast my gain from the match 1yr ahead of time.

[neil]

I work for a company which has both an ESPP plan and uses RSUs as part of our compensation.

You should have a better read on your company than the general market, as long as you aren't drinking the kool-aid your managers probably feed you.  My company was more or less undervalued from 2006-2011 and yielding 4% for much of that time with growing revenues and I decided to be patient with it.  I did well enough and readjusted it during 2014 to more reasonable numbers.  But at the time I didn't think much about retirement goals and it being something achievable very realistically in my early 40s, and in retrospect with that I do feel your portfolio will be more predictable to just move it into index funds.  I am not unhappy about what I did, but I don't think it's the best thing for everyone.

I also manage about 25% of my assets in individual stocks, mostly because I enjoy it as a hobby.  My company stock is basically part of that.  Having more than basic knowledge about general investing helps with the part about seeing your company for what it is.  If you can't really do that, then choosing buy/sell points will feel a little bit like going to the casino.  And if you are maintaining a sizable position in your company that you keep adding to, you are going to have to make these decisions on an ongoing basis to keep your exposure down.  Making the effort to sell immediately and put into an index fund takes zero effort.  Don't underestimate the time you have to spend to deal with this.

In the end, too much of your future wealth is already tied to a company you plan to work for in the foreseeable future.  It is perfectly acceptable for the correct percentage of stock to hold to be 0%.

[MrMoogle]

So the general rule I've heard is no more than 10% of your portfolio in your employer's stock.  I think it's a good rule in general. 

It looks like you have about a $30k net worth, and in a year it'll be +$13k and $8k is in your company's stock.  So that's ~20%.  So following the general rule, it says not to max it out, only do about half. 

If you keep rolling it out over time it'll drop.  But you basically have a guaranteed 33% gain in that money, in one year.  That is hard to pass up, and I wouldn't pass up on it.  In a few years, you'll be down to 10% or lower.  And 20% in the meanwhile doesn't seem that risky to me. 

I'd do it :)

[shuffler]

How much is too much?  Or is there no such thing?

To answer the question overly simply:  There's an annual $25,000 limit.  So $25,001 would be too much.

[innerscorecard]

How much is too much?  Or is there no such thing?

To answer the question overly simply:  There's an annual $25,000 limit.  So $25,001 would be too much.

100% agree. This is an arbitrage opportunity pure and simple, and is basically part of your total compensation. If you don't do it to the absolute maximum allowed, you are throwing money away.

On the other hand, the second required part of the arbitrage is selling all stock received this way as soon as possible.

[starguru]

I max out my ESPP.  The mechanics of my plan are 15% discount of the price on the first or last day of the period -- so its practically a guaranteed gain.  I also look at it as a way to automatically save a portion of my income.  Since I have a high degree of confidence in my company stock I hold until the shares go to long term then sell to lock in gains.  Of course this means I have a significant portion of my AA in my company stock, which is a risk.

[ncornilsen]

Word of caution:

I have an ESPP plan that purchases PCP.

I put in $8500 for 2014.
My purchase price was based on the lower of the price on Jan 1 2014 of Dec 31 2014. So I bought at 240.88 with a 15% discount. (my cost basis is $204.)
Someone, not sure if it's the company or the broker, holds onto the stocks for 3 weeks after Jan 1 2015.  I didn't get control to sell the stocks until today.

Price at opening today? $190. So, I lost like 5% of my initial investment over the weeks it took for the stock to be transferred to my name.  There IS risk.

Now, I hope this dip is short lived, so that I can unload it and diversify into my index funds.

[gt7152b]

On the other hand, the second required part of the arbitrage is selling all stock received this way as soon as possible.

This is conventional wisdom and it's hard to argue with because it's basically no risk money you can make. I've always taken on the risk of waiting at least 1 year to get the long term capital gains tax rate. It's been a worthwhile risk for me because I've never seen a big drop in stock price during the 1 year period. In fact, I've seen some nice gains and am still holding some ESPP from my current and previous companies that I think will continue to increase in value. If I had seen a drop in stock value that would have been a good chance to buy at a more favorable price because I don't see any of these companies going under for a very long time. This is just my specific situation and based on my personal valuations of these companies. I wouldn't suggest that this be a blind policy for anyone.

[innerscorecard]

On the other hand, the second required part of the arbitrage is selling all stock received this way as soon as possible.

This is conventional wisdom and it's hard to argue with because it's basically no risk money you can make. I've always taken on the risk of waiting at least 1 year to get the long term capital gains tax rate. It's been a worthwhile risk for me because I've never seen a big drop in stock price during the 1 year period. In fact, I've seen some nice gains and am still holding some ESPP from my current and previous companies that I think will continue to increase in value. If I had seen a drop in stock value that would have been a good chance to buy at a more favorable price because I don't see any of these companies going under for a very long time. This is just my specific situation and based on my personal valuations of these companies. I wouldn't suggest that this be a blind policy for anyone.

That's a very good point. I always measure my own returns on an after-tax basis as well. I suppose this exact decision may also depend on your expected tax bracket for the year.