Saving in employer's stocks

Megan McArdle blogs:

* One-third of employees eligible to invest in company stock through their 401(k) have more than 20% in their company's stock.

* Almost 9% of them have more than 80% invested in their employer.

* For employees in their 60s, almost 20% hold half of their 401(k) savings in company stock.

(This, in regard to a report that Bear Stearns' employees' 401(k) plans were heavily invested in the company's stock. The thread of comments then discusses whether BS offered or did not offer stock-purchase options in their 401k's (it seems they did not, but had an ESOP for it).)

Should I feel sorry for Enron/Bear employees who put 20 or 80 percent of their pensions on Enron/Bear shares? There was plenty of advice out there to NOT do that. I certainly don't feel sorry for traders/analysts/executives etc who did it: they are financially savvy. Perhaps some employees who are not expected to have known better? OK, I feel sorry for that hypothetical lot.

Thaler and Goolsbee must be having a melancholy-tinged chuckle. Is this more evidence that we're all irrational (or so bad at dealing with risk or so prone to mistaken beliefs) that we need to be protected from our own failed instincts? (Like whether to have the option to sign in or to sign out of 401k's to start with.)

(And please, let's not get started with the argument that employees have better info that non-employees and so their decision is rational. To start with, ESOPs don't work that way: they cannot let employees react to privileged info quickly as it would smack of insider trading; by the time they can do something, the market already has the info (for example, you announce your intent to buy at the beginning of a quarter and the purchase is done at the end of it). What really matters are the incentives given to the purchase (matching purchases, discounts on the price, choosing the lowest price over the following quarter, etc). Also, a case could be made that there is an illusion of having "better information" that will allow you to beat the market after controlling for the special incentives and that the apparent irrationality stems from that, from mistaken believes.)

Hmm. If some smart behavioral econ can show that people do have an irrational tendency to over-invest in their employer's stock (which my experience in companies that offer ESOPs suggests is the case), does this mean a cap should be placed on how much of one's retirement savings can be in the current employer's stock?

Since my knee-jerk, libertarian reaction is to say "no" to more regulation, let me make a modest policy proposal that operates through education (indoctrination?):

Some high-school course should work hard at driving-in a three-step lesson:

1. Out of each paycheck, first deal with expenditure needs; then with long-term savings; and only then, if you want to gamble, allocate a percentage of the remaining income to it. Stick to that percentage as an iron-clad max (and never as a min!).
2. Dealing in individual shares is gambling, no matter what, period.

Corollary: if your employer offers stock-purchase incentives, that is nothing but subsidized gambling. Allocate accordingly, given the shift in relative returns. But do so out of gambling money.


3. 401k = LONG term savings = BROAD index funds, where you can park the money and forget about it until retirement starts getting close.

Then victims of ESOPs-gone-bad cannot claim to not have known better. And we don't need to feel guilty about their despair. Which will avoid creating perverse incentives through the political process.