Employer stock as an investment option in 401(k) accounts is rapidly disappearing – but not yet close to extinction.

Among employees of large publicly held employers, employer stock represented 11% of 401(k) assets at the end of 2014, according to recent data from AonHewitt. That represents about a 50% drop over the past decade.

Still, “more than half of all participants have some money allocated to employer stock when that investment option is available,” says AonHewitt’s benchmark report, “Measuring Employee Savings and Investing Behavior in Defined Contribution Plans.” And of those, 46% have at least one-fifth of their assets in employer stock.

Also see: 4 reasons the feds are examining company stock in 401(k) plans

The average employer size in the survey of 144 DC plans was 24,700 eligible employees. The average participation rate overall was 78%, but plans with auto-enrollment features averaged an 84% participation rate, versus 62% for those that did not.

Among plans offering employer stock as an option, the average employee allocation to that investment was 12.9%, down from 13.8% in 2013.

Imposing restrictions

In a list of “ideas to improve investment returns or diminish risk,” the report encourages employers that offer company stock in their 401(k) plans to restrict that option, given what AonHewitt considers excessive employee allocations to employer stock. The report notes that 31% of employers that do have an employer stock option in their plans have some kind of limit on how much of that stock employees can acquire.

“Currently, defined contribution plans serve as the primary retirement savings vehicle for most plan sponsors and their employees. As such, relying upon concentrated holdings in any single security is not appropriate for the majority of investors.”

Also see: ESOP fiduciaries not entitled to presumption of prudence

Earlier this year, Chevron stopped matching participant contributions with company stock to “help employees maintain a diversified portfolio” that meets “their goals, time horizon, and risk tolerance,” according to a company spokesman. Chevron stock has lagged broader stock market indices for several years, in part due to the decline in oil prices.

Supreme Court influence

Another force driving the decline in the offering of employer stock was the 2014 Fifth Third Bancorp v. Dudenhoeffer U.S. Supreme Court case. In that landmark decision, the Court rejected a prevailing doctrine assuming a “presumption of prudence” in employers’ exercise of their fiduciary duty in including employer stock in their retirement plans.

Also see: Plan sponsors taking action in wake of Fifth Third decision

Also, academic research dating back several years has shown that employees often do a bad job of handling the responsibility of deciding how much employer stock to own. For example, a study published in the Journal of Economic Perspectives in 2007 (before the financial crisis), “Heuristics and Biases in Retirement Savings Behavior” by Shlomo Benartzi and Richard H. Thaler, referencing other studies, made the following observation:

“Employees at the worst-performing firms allocated 10% of their retirement contributions to company stock, whereas those at the best performing firms allocated 40% of their contributions to company stock. … subsequent stock performance found no evidence that employees have any superior information regarding their firm’s future prospects. Specifically, there was no correlation between the allocation to company stock, and subsequent stock performance.”

Richard Stolz is a freelance writer based in Rockville, Maryland.

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