Author Topic: What is this? 401k Company "stock fund"  (Read 5761 times)

Chranstronaut

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What is this? 401k Company "stock fund"
« on: July 30, 2014, 10:08:42 AM »
I work at a Fortune 500 company with many good 401k options and a 6% match on 401k.  I am new to investing and am going the low-fee index fund route both in my 401k and my taxed accounts.  I'm happy with my 401k choices, but there is one option that I don't really understand.  They call it a "Company Stock Fund".

Does anyone have experience with this?  I've combed the fine print in the fund information and have found the following:
-Price of fund units is the same as stock price of the day
-You don't actually own stock, but a unit in the fund with equivalent value as current stock price
-1-4% of fund is kept in cash to cover members' withdrawals
-There doesn't appear to be any discount when buying and there is no additional company match, just the same 6% as other funds
-There is a quarterly dividend payment that can be cashed out or re-invested
-Short term trade fees are 1.5% and fund fee is 0.05% (this is nearly the same as the index funds)

It seems to me that if I wanted to own stock in the company, I should just buy it on my own.  Why would I want to buy this fund when it is not actually stock, is not diversified and the only advantage is tax deferment?  It's doesn't seem like the worst choice, but it doesn't make sense to me.

Does anyone use something like this? What would you do if it were offered to you?

Chranstronaut

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Re: What is this? 401k Company "stock fund"
« Reply #1 on: July 30, 2014, 10:13:00 AM »
And a followup question:

A huge number of employees here are eligible to retire in the next 10 years.  Since this fund is only for current and former employees, what will it do to the fund if 25% of members start cashing out for retirement at the same time?  Since fund prices are tied to stock prices, maybe it won't really have an effect?

Cromacster

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Re: What is this? 401k Company "stock fund"
« Reply #2 on: July 30, 2014, 10:21:43 AM »
It does seem odd, though I have never heard of anything like this.

My guess is it is like a mutual fund, except that it only owns your company stock.

Which seems a little shady to me.  Is your 401k automatically invested in this fund?

Chranstronaut

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Re: What is this? 401k Company "stock fund"
« Reply #3 on: July 30, 2014, 10:32:11 AM »
Which seems a little shady to me.  Is your 401k automatically invested in this fund?

I don't remember how things were set up when I started my account.  I didn't know what I was doing when I got hired a couple years ago, but I knew enough to invest up to the company match and then put it all in a targeted-date fund.  I've never like the company stock fund.  I feel like it's intentionally misleading: it's listed as the only option under a header called "Company Stock", but it's not really stock at all.  A lot of people here seem to believe it's company stock and I overheard one coworker say they were 100% invested in that fund o.0

I saw someone on here with a great hack for making money off their company stock options at Microsoft, so I wanted to make sure I wasn't missing out on something with mine.

Cromacster

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Re: What is this? 401k Company "stock fund"
« Reply #4 on: July 30, 2014, 10:40:11 AM »
Which seems a little shady to me.  Is your 401k automatically invested in this fund?

I don't remember how things were set up when I started my account.  I didn't know what I was doing when I got hired a couple years ago, but I knew enough to invest up to the company match and then put it all in a targeted-date fund.  I've never like the company stock fund.  I feel like it's intentionally misleading: it's listed as the only option under a header called "Company Stock", but it's not really stock at all.  A lot of people here seem to believe it's company stock and I overheard one coworker say they were 100% invested in that fund o.0

I saw someone on here with a great hack for making money off their company stock options at Microsoft, so I wanted to make sure I wasn't missing out on something with mine.

Reminds me of Enron.

If it's not automatic, I guess I wouldn't worry about it, but I wouldn't invest in it (with the little knowledge that I have).

matchewed

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Re: What is this? 401k Company "stock fund"
« Reply #5 on: July 30, 2014, 11:27:40 AM »
I'd steer clear of it personally. Your employment is tied up in that company why would you want your investments tied up in that company too? Eggs in one basket and all that... Diversification of your finances is dependent on where that money is coming from that feeds your finances as well.

It is especially bad IMO since you get no discount for purchase.

As for whether this would cause some massive titanic shift in the fund price in the next 5-10 years as your peers leave the workforce, probably not. As you noted the fund price is the stock price. They're intrinsically linked as they're probably the same thing. The odds of the employees all cashing out at the same time would be ridiculously low and even if that were to happen outside investors would probably be snapping up the shares. I don't see a problem with that system.

ZiziPB

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Re: What is this? 401k Company "stock fund"
« Reply #6 on: July 30, 2014, 02:55:45 PM »
I work for a company that offers the same option in our 401k.  I always thought that the reason they offer this option is the company wanting its employees to invest in its stock but you cannot invest in individual stocks in a 401k.  In any event, I have enough exposure to my employer's stock with the RSUs I get so I don't invest in it.  It is not an default investment in our 401k - if an employee does not select his/her investments, they default to a Vanguard Target Retirement Fund based on age.

seattlecyclone

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Re: What is this? 401k Company "stock fund"
« Reply #7 on: July 30, 2014, 03:12:11 PM »
Many companies offer something like this for employees who may want to invest in their company's stock. My first employer out of school even made their entire company match in the form of company stock by default. As you point out, it isn't company stock per se because you don't have voting rights and a small percentage of the fund is kept in cash, but the economic value of this fund likely tracks the company's stock price closely enough that you should consider it basically equivalent to owning company stock. As others have said, betting even part of your retirement on your current employer's stock price is a poor idea for a variety of reasons.

Chranstronaut

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Re: What is this? 401k Company "stock fund"
« Reply #8 on: July 30, 2014, 03:27:10 PM »
I work for a company that offers the same option in our 401k.  I always thought that the reason they offer this option is the company wanting its employees to invest in its stock but you cannot invest in individual stocks in a 401k.

Oh, this makes a lot of sense.  I never really thought about that lack of stocks in 401k plans, and now I feel a little stupid.  This is what I was looking for, thanks!

...As others have said, betting even part of your retirement on your current employer's stock price is a poor idea for a variety of reasons.

Nope, I'm not touching it.  Thanks everyone for your help!  I really appreciate it.

FWIW: I did a little math trying to figure out the benefit of this kind of fund, comparing it to investing an equal amount in plain old company stock.

Assumptions:
-Investment is $1k every year for 30 years and starting stock price is $100
-Both investments yield 7% growth and 4% dividend payment
-Stock fund is subject to 0.05% fee on all holdings
-Inflation eats 2% of 4% of stock fund kept in cash every year
-Actual stock purchases cost $7 a share and are never sold, no yearly investment fees
-Actual stock dividends subject to 15% tax

If you're not paying tax on the dividends in the 401k, you could come out 10% ahead in this example.  So, at least my coworker investing all in it has that going for him *shrugs* :/

Davids

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Re: What is this? 401k Company "stock fund"
« Reply #9 on: July 31, 2014, 04:24:19 PM »
The only reason anyone should own stock in the company they work for is because either your comp package includes stock grants or your company offers an ESPP where you can get the stock at a discount, say 15%. Other than those scenarios there is no reason to own stock in the company you work for.

Chranstronaut

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Re: What is this? 401k Company "stock fund"
« Reply #10 on: August 05, 2014, 01:53:27 PM »
Update: I overheard my cubicle mates discussing investments, and it peaked my interest (I am sitting in the same cubicle as them, so it's not really eavesdropping, right?)  Turns out they ALL buy into the company stock fund and at least one of them REDUCED their holding from over 50% to 20% because he felt like the stock wasn't doing as well as it was before...

These people are so smart and good at math.  Wat.

matchewed

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Re: What is this? 401k Company "stock fund"
« Reply #11 on: August 05, 2014, 03:12:32 PM »
Update: I overheard my cubicle mates discussing investments, and it peaked my interest (I am sitting in the same cubicle as them, so it's not really eavesdropping, right?)  Turns out they ALL buy into the company stock fund and at least one of them REDUCED their holding from over 50% to 20% because he felt like the stock wasn't doing as well as it was before...

These people are so smart and good at math.  Wat.

Smart and good at math doesn't mean that they aren't susceptible to emotions regarding money. We all have biases and cognitive dissonances, it is learning them and catching when they're being used against us or used by us which is important. The math skills and intelligence would just be a bonus.

Ever had that guy who sold you something you weren't sure you needed? Or haggled and came out of it wondering if you'd been suckered or could have gotten a better deal? Even someone that seems technically less capable at their job but get promoted anyways? Those people who were more skilled at those things than you weren't necessarily good at math and they'd be considered smart in different ways than traditional measures of "smartness" AKA how many pieces of paper has someone handed you for lots and lots of money.

That being said lots of people reason it away as they work for the company, so they can make the company better, and that means higher stock prices and yay more money. Forgetting the simple fact that they have so much income from that company that their financial structure is better suited to putting money away from that company, and possibly that industry if they're individual stock investors, for simple diversification purposes.

m8547

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Re: What is this? 401k Company "stock fund"
« Reply #12 on: August 05, 2014, 09:50:58 PM »
My company has a stock fund in the 401k (administered by Vanguard). Their matching contribution goes in there automatically, no matter what fund I select to contribute to. If I don't want to own it I need to go in periodically and exchange. I talked to people both at Vanguard and the company, and there's no way around it because that's how it's set up. The company has been doing well, and I'm lazy, so I've left the money in there for now.

They also offer a stock purchase plan, and I've started using that and selling immediately. Or I might sell once every two months to save on transaction fees ($17 per sale, and a small per share fee, but I'm only getting $100 of matching funds each month).

gimp

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Re: What is this? 401k Company "stock fund"
« Reply #13 on: August 05, 2014, 09:56:01 PM »
And a followup question:

A huge number of employees here are eligible to retire in the next 10 years.  Since this fund is only for current and former employees, what will it do to the fund if 25% of members start cashing out for retirement at the same time?  Since fund prices are tied to stock prices, maybe it won't really have an effect?

Look at the daily trade volume of your stock. If every employee cashed out at once, ignoring the implication of every employee cashing out at once, it might affect the price for a week. At most. These transactions will be pennies compared to the daily volume.

JetBlast

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Re: What is this? 401k Company "stock fund"
« Reply #14 on: August 06, 2014, 05:37:08 PM »
A former employer of mine would make their matching contribution in a company stock fund.  I'd always exchange out of it as soon as I could. My current employer has a company stock fund in the 401k but is kind enough to deposit their match in funds of my choosing.