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Reducing Risk in Your 401(k)

January 28, 2002|Liz Pulliam Weston

Enron Corp.'s bankruptcy has highlighted some of the risks of owning company stock in a retirement plan. Financial planners recommend the following steps to help reduce risk:

* Curb your enthusiasm. No company's future is entirely secure. You may believe in your company's long-term prospects, but remember that both your job and your retirement are at stake if you make a big bet in company stock. A diversified portfolio is likely to give you good returns with lower risk than a gamble on a single stock.

* Limit your risk. Aim for a total investment portfolio that has no more than 10% to 20% in company stock. Include in your calculations retirement plans, employee purchase plans and the value of any stock you bought with employee options. The less secure your job or your company, the fewer shares you should hold. You can aim for 20% if your job and company are secure and you're covered by a pension.

* Don't invest on autopilot. At least twice a year, monitor your accounts and--if you can--sell company shares if their value exceeds 10% to 20% of your portfolio. Some employers restrict their workers' ability to sell shares issued as a company match, but most allow sales of shares purchased with employee contributions.

* Invest outside your 401(k). If you can't sell enough shares to lower your company stock exposure to acceptable levels, consider reducing contributions to your 401(k) and instead invest up to $3,000 a year in an individual retirement account or a Roth IRA. These accounts allow you to invest in other stocks or in mutual funds, although you may not get a tax deduction for your contribution.

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