IRS: 401(k) Participants May Sell Company Stock

A new rule streamlines the 401(k) diversification process.

By + More

Some companies match employee 401(k) contributions or pay bonuses in company stock. But, as all former Enron employees know, holding too much company stock can be risky. A new Internal Revenue Service ruling this week says 401(k) participants with at least 3 years of service must be permitted to sell company stock and reinvest the assets once every three months.

[See 401(k) Recovery Winners and Losers.]

At least three other investment options other than employer securities must be offered, each of which has different risk and return characteristics than company stock. Beneficiaries of the 401(k) account holder will also be allowed to direct the assets out of company stock. The new regulation implements a provision of the Pension Protection Act of 2006 and applies beginning January 1, 2011.

[See 7 401(k) Mistakes You’re Probably Making.]

Many workers are heavily invested in the stock of the company they work for. Among employees who have access to company stock, the average allocation was 19 percent in 2009, according to a Hewitt Associates study of nearly 3 million 401(k) participants. About 13 percent of these employees had half or more of their 401(k) balance in their employer’s stock. Over investing in company stock is risky because it ties your nest egg to the company that already pays your salary. If the company performs poorly you could not only lose your job, but your savings.

[Check out this 401(k) Wish List.]

The Employee Retirement Income Security Act prohibits traditional pensions from investing more than 10 percent of assets in company stock, but there is no similar restriction for 401(k) plans. Now retirement savers can adhere to that prudent guideline themselves.