RadioShack Workers Will Lose Their Jobs and Their Retirement
By Jane White
RadioShack workers won't be just losing their jobs as a result of the company's bankruptcy filing, but a big chunk of their retirement savings as well. As was the case with Enron, employee contributions to their 401k accounts were matched with company stock. [See Editor's Note below.]
RadioShack's employees bought almost 600,000 shares in the last three years, even as its problems deepened, as Mitchell Schnurman reported in the Dallas Morning News. While RadioShack shares in the 401k were worth over $142 million in June 2007, before the recession, by last June, it was down to $3.5 million and has kept falling.
"Holding company stock is a danger that's just not worth it," said David Blanchett, who heads retirement research at Morningstar. "People are not rational investors, and they don't realize the risk. RadioShack is a perfect example of what can go wrong."
At least three class-action lawsuits were filed against RadioShack in November and December, alleging that executives breached their fiduciary duties to the retirement plans. In December, the Department of Labor also launched an investigation into RadioShack's compliance with retirement laws.
Even some conservatives are opposed to this practice. Alex Brill, a research fellow at the American Enterprise Institute, thinks Congress could make a case for completely banning company stock inside a 401k. "Put simply, not having an efficiently diversified 401k is an unequivocally bad idea, and the government should not subsidize bad ideas," Brill writes in a recent policy paper.
While most employers make matching contributions in cash, too many large companies still make a stock match. According to a survey by Deloitte & Touche, 13 percent of employers use their shares to make matching contributions.
Contrary to the advice of retirement experts, employees at some of the largest U.S. corporations have as much as 70 percent of their retirement savings invested in company stock, according to Blanchett. Many of these companies are household-name Fortune 500 companies, according to a paper Blanchett authored in 2013 Tightly held Publix, the supermarket chain, tops his list, with more than 70 percent of its employee 401k holdings invested in company stock. Sherwin-Williams was also above 70 percent. Nineteen companies, including Colgate-Palmolive, Exxon Mobil, Dillard's, Chevron, McDonald's and Lowe's, have more than half of employees' 401k assets invested in their own stock.
Another recent study showed that companies with high levels of their own stock in their retirement plans often fail to scale back their exposure even when they're heading into financial straits, according to a new study by academics at Boston College, the University of California, Riverside and the University of Alberta. The study found that large stakes in company stock see little variation in the years before struggling companies fall into default or even bankruptcy.
To make matters worse, if you are unlucky enough to work for one of the companies, it's unlikely that the mutual fund companies will warn you of this danger, since they risk offending the employers who chose these funds in the first place. Spokespeople for two of the biggest 401k plan asset managers, Fidelity Investments and Vanguard Group, declined to respond to my requests for how they handle these issues.
What should you do if you're one of the more than 9 million Americans whose employers match in company stock? Limit it to 10% of your assets, as pointed out at 401khelpcenter.com, which is run by my former business partner. More helpful information is on the Finra (Financial Industry Regulatory Authority) website: www.finra.org/Investors/ProtectYourself/InvestorAlerts/RetirementAccounts/p013381. And you might want to consider looking for a new job at an employer that values compensating their valuable employees over artificially boosting their company's share price
Jane White is the founder and president of Retirement Solutions, LLC an advocacy organization dedicated to 401k retirement adequacy. She currently authors a blog on financial issues for the Huffington Post, has appeared on Fox Business News, CNN and CNBC, was a syndicated personal finance columnist for Gannett News Service and her articles have appeared in The New York Times, Barron's, Working Woman, Newsday and Employee Benefit News. She can be reached at firstname.lastname@example.org
[Editor's Note: Justin W Johnson, VP, Compensation, Benefits & HR Data, RadioShack Corporation, expressed concern about certain factual matters in this piece. He noted that, "In at least my 7 years with the company, RadioShack has not matched employee contributions to their 401k accounts with company stock, and as far as I know, this has never been the company's policy.
"Until this past February when we eliminated our match, we matched employee contributions with cash allocated to the same funds the participants voluntarily selected. While we offered company stock as a choice for employees within their various investment options until September, 2014, the choice to invest in company stock has been purely voluntary by plan participants."]
401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise.