Risks of Employee Stock Ownership
A growing number of employees find themselves with extensive holdings in their own companies' stock but most are not aware of the risk factors involved. The International Association for Financial Planning has issued a Critical Issues Report, entitled Holding Employer Stock: Managing the Risks, that explores some of the risk associated with employees who have heavy stock holdings in their own companies (directly or through a retirement plan) or possess options to buy company stock.
Options are often seen as current income that employees quickly cash out in order to spend on luxury items. A 1996 study cited found that many workers cashed in their options within six months of becoming eligible, thereby sacrificing an estimated $1 in future value for every $2 realized.
Other concerns identified were a lack of asset allocation because of an overconcentration in one stock, the possibility of insider trading and misunderstanding of both trading restrictions and a company's mandatory stock ownership requirements for management. The possible imposition of the alternative minimum tax when an option is exercised was often overlooked. From a more direct financial planning perspective, the report concluded that attention should be addressed to whether transfers of options are permitted, if stock distributions are best and whether to defer taxes via an IRA rollover.