Profit Sharing Plans

There may be no bigger danger than having all of your retirement invested one company (ask former Enron, Bear Stearns or Lehman Brothers employees). But that’s essentially what you have with many profit-sharing plans, including popular ones like employee stock ownership plans or ESOPs. ESOPs are offered as compensation benefits in private companies of all different industries. They are designed to align compensation with corporate performance and boost morale and productivity by giving employees some ‘skin in the game.’

If you are a currently employed and have a profit-sharing plan, you may be doubly exposed. A severe downturn in your industry or your company could hurt both your employment (you could get laid off) and your employee stock you’ve accrued could drop in value or be gone if the company goes bankrupt.

If you are currently employed by the company and have all or substantially all of your retirement in the companies stock, you may be asking for trouble. While the vast majority of company profit sharing plans and ESOPs do well, there is the risk of too many of your ‘eggs in one basket’. This is known as overconcentration. You should be offered more than just the stock of company you work for. Consider a LEAP put option on the company stock if it’s public.

Another problem is the misalignment of goals between top management and other stakeholders. Though this is the minority, often C-suite corporate executives are