Employee Stock Purchase Plans

Watch Out for the Enron Trap

Many companies offer their employees the opportunity to buy stock through a variety of employee stock purchase plans. The plan may be part of a qualified retirement plan such as a 401(k) or it may simply be a benefit offered by the company.

Employees are encouraged to participate in these plans and given incentives to do so in some cases. But is it a good idea?

The answer is yes and no. Like most things in life, if done in moderation, purchasing stock in the company where you work is a good thing – especially if the company sweetens the deal through a match program in your 401(k) or some form of discount.

Besides, if you don’t have enough confidence in the company you work for to own its stock, you might want to re-examine your career path.

Here’s where the problem comes in: Too much of a good thing can lead to disastrous results should something bad happen to your company.

If the news of employees losing substantial portions of their retirement nest egg because it was tied up in company stock that went south sounds familiar, think back a few years to the Enron fiasco.

When the energy-trading giant collapsed, many of its loyal, honest employees lost their entire retirement account because they had been encouraged to buy Enron stock.

Conclusion

Here’s the bottom line: It is never a good idea to have any one investment (stock or mutual fund) make up more than 10% - 15% of your portfolio, even your own company’s stock. Certainly take advantage of any employee stock purchase benefit; just don’t let it get out of balance. Anyone who tries to convince or coerce you into buying more of your company stock is not acting in your best interest and, depending on how they approach you, may be violating securities laws.