In my 2010 article about KSOPs, I discussed how KSOPs risk employees over-leveraging their employment into excessive financial risk. KSOPs blend 401k and ESOP plans in which the employer uses an ESOP with the employer’s stock as an investment as an investment option within the 401k to let employees use their retirement savings to invest in the employer’s stock.
When employees invest in the employer’s stock in their 401k, they place life-long financial risk on the employer. The employee’s current income stream is dependent on the employer’s financial stability. The employee is also dependent on the employer’s financial stability for other benefits, such as health insurance and disability benefits.
By investing retirement savings in the employer’s stock, the employees put their retirement in the hands of the employer’s financial stability. It’s a great deal if the employer has great stability and will be stable well into the foreseeable future but there are few companies that fit that explanation. When the employer’s financials falter, the employer often cuts benefits, cuts pay, cuts employees and the stock drops. That means the employee is at risk to lose current and future income. A great example of how putting too much risk on the employer’s financial stability is dangerous to employees is the recent, sharp decline at Blackberry.
Blackberry was once thought of as an extremely strong company in the tech/telecommunications sector. Blackberry enjoyed the top position in business to business mobile communications contracts. They were well regarded in the financial market and the job market. However, Blackberry’s market share eroded over the past several years by Apple’s iPhone and the android phones. Blackberry has yet to find a new approach to keep itself competitive.
Blackberry announced a reduction of 40% of its workforce following a $1 billion loss, causing a 19% decline in its stock price. Now, I don’t know if Blackberry has a KSOP but you can see how painful that loss would be for employees if they do. Not only will 40% of the workforce lose their current income stream and benefits but 100% of the workforce lost almost 20% of their retirement savings wrapped up in their employer’s stock.
It’s bad enough to lose one’s job and current income stream; but to lose both current and future income is financially disastrous. The employees may have made a lot of money on their employer’s stock during its heyday; but now they are giving that money back to Wall Street. Had the employees diversified their retirement savings they could mitigate the financial harm from the employer’s downfall. Many financial advisers advocate diversification of investments. One’s employment is a financial investment in the employer. There may not be a good reason to ignore diversifying that financial investment; but employees should consider their financial decisions with the assistance of a competent financial adviser.