Updates

Equity Awards: Hold ’em or Fold ’em?

Jan 6th, 2011

*Oaktree Financial Advisors is neither endorsed by nor affiliated with Eli Lilly 

Eli Lilly employees will soon be receiving your 2010 equity awards.  In determining whether you will continue to hold the stock or redeem it, you should consider how much of your overall investments are in Eli Lilly stock.  Between equity awards and 401(k) matching contributions, many Lilly employees accumulate a large percentage of their wealth in Lilly stock. Having a substantial position in company stock could have severe consequences should there be a significant decline in the stock price.

Consider the infamous implosion of one of the 1990’s highest flying companies, the energy firm Enron. At Enron, more than 57 percent of employees’ 401(k) assets in 2001 were invested in company stock as it fell 98.8 percent in value that year. Five thousand jobs disappeared too.  Likewise, employees at Lehman Brothers, Bear Stearns, Washington Mutual, General Motors and many other companies were left holding significant stakes in their companies during the very dark days of 2008. By the time the scope of the financial crisis became clear, stock prices were plummeting; it was too late to sell. Then the other shoe dropped; thousands lost their jobs.

The worst outcome for an investment, of course, is complete loss of value, as in a bankruptcy. While individual companies can and do go bankrupt, it is very unlikely that a diversified portfolio structured with various holdings could ever collapse to zero.

Currently, there are no restrictions on the amount of 401(k) assets that can be held in company stock.  While the Employee Retirement Income Security Act of 1974 (ERISA), restricts traditional pension plans from investing more than 10 percent of assets in company stock, there is no similar restriction on 401(k) plans.

Generally we recommend holding no more than 10 percent in any one stock, but when it is the stock of your employer, five percent or less may be a more prudent goal. However individual goals vary. If you have any questions regarding your holdings, please give us a call.

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