The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.


Topic Category
The article below is presented as a single post. Click here to view all posts.

By David GordonDirector, Eaton Vance Advisor Institute

If you have clients working for large public companies, they may have a source of risk you cannot see. It lurks below the waterline like the majority of an iceberg. That risk is employer stock inside an employer-sponsored qualified plan, such as a 401(k) plan, and it can silently become a client's largest exposure to employer stock. The stock you see "above the waterline" — their equity awards — may be much smaller.

Many advisors tend to overlook this "below-the-waterline" risk in retirement plans because they:

  • Are not the plan administrators
  • Do not provide advice on assets they don't manage

However, the concentration risk is real — especially for employees who have spent most of their careers with a single employer. So how can you see below the waterline?

Five questions that go deeper

Try asking your clients these questions and watch your visibility improve:

  1. "Do you participate in an employer-sponsored qualified retirement plan?"
  2. "What percentage of your current allocation in that plan consists of your employer's stock?"
  3. "What percentage of annual contributions — yours and your employer's — is in the form of your employer's stock?"
  4. "If your employer stock were replaced by cash overnight (which would not be a taxable event in a qualified plan), would you buy back all of the employer stock you had before?"
  5. "If you left your employer tomorrow, would you have a different opinion of that stock exposure?"

Your clients' answers can tell you a lot about their exposures and attachments to employer stock — exactly what you need to know if you want to introduce the concept of diversification.

Questions 1, 2 and 3 help illustrate the extent of their concentrations, while questions 4 and 5 challenge their emotional attachments. It is important to note the questions do not challenge the investment outlook for the employer. Instead, they help to expose the size and nature of a client's exposure — the mass of the iceberg below the surface.

Bottom line: To help your clients manage concentration risk, be sure to look above and below the waterline to see just how much of the proverbial iceberg rests below its surface.