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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.

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