RSUs, PSUs, ESPP, Stock Options, Stock Awards, Deferred Compensation, 401(k), Pre-tax, Post-tax… head spinning yet? Unsure what they are and how they differ? Sometimes when there are so many options our brains shut down. And while I can go into various details on all of them, how they work, the pros and cons, taxation, etc., for now I’ll focus on one thing. Do you know what they all may have in common?
That’s right! They can all involve employer stock. Microsoft, Amazon, Facebook, Nordstrom, Starbucks and many other employers offer some, if not all, of these in their benefit or “total compensation” packages.
The first five at the beginning of this article all involve employer stock and the 401(k) and Deferred Comp plans may include stock as an investment choice too. While it can be hugely beneficial to have company stock, if you are not careful, you may build up a significant concentration. And a concentration of one stock can cause increased risk. So, what to do? Here are a few steps:
Step 1: Determine how much stock you have in total, including all vested Restricted Stock Units, Performance Stock Units, Stock Options and Stock Awards. I suggest you review the different places you own stock and come up with the total shares owned. For now, only include those that are vested. We will get to the unvested shares later.
Step 2: Calculate what percentage of your overall investable assets are in this one stock.This will take a little more effort. You’ll want to list all investment accounts, including the employer stock and their values. Unless your cash reserve is large, I would not include it in this calculation. And don’t include personal assets such as a home, vacation home, boats or cars. Just investable assets. Then divide the amount of stock by the combined value of all investable assets to get this percentage.
Step 3: Evaluate the percentage. Shocked by what you find? This process alone is eye opening. 50%, 60%, 70% or more is all too common. Having focused on this topic for many years, I can tell you that while most people know they have “a bunch”, they have not taken the time to determine the actual concentration. Clearly, we need to start with the facts, and this step allows the client to know their situation more fully and then opens up detailed conversations regarding their exposure, risk and steps that can be taken.
Step 4: Consider upcoming vestings. And if you don’t act, this will only push the concentration higher. As if the percentage we already calculated wasn’t enough, it’s like that commercial when they get your attention only to say “wait, there’s more.” So this gets a little tricker as you need to look at upcoming vesting schedules and if you have different plans, such as both Options and RSUs, then make sure to include them all. As an example, if it’s January when you do this, but in February some Options vest, you will want to calculate both the current concentration and then the concentration after the vesting. For instance, you may be at 65% now, but with the upcoming vesting you may go to 75%. This is important for a few reasons. First, it’s a lot. Period! And second, if you only looked at current exposure, you may choose to back your stock ownership down by 10%. And if you did that, and then didn’t take into account the upcoming vestings, you could be back to where you started.
Step 5: Now what? Well, you can ask a generalist who is likely going to tell you to aggressively reduce your stock exposure so that they can manage your portfolio. Or you can engage an advisor with experience and proven success specializing on high concentrations and employer stock plans. We have focused on this specific situation for almost 30 years and have built a personalized process to help our clients unwind their concentration. But we don’t do it with “guns a blazin” like too many brokers and planners. Nope, far from it. We are intimately aware and mindful of this special situation and the connection you have with the employer and the stock. Beyond the number of shares and vesting schedules there are other things to consider.
- You have familiarity with the company, and perhaps a sense of pride
- You have loyalty to the company
- You may be an insider with trading windows
- You may even have specific stock ownership requirements
- And so much more
Through three decades of experience working with clients who have high concentrations of stock we have built our unique and thorough process. Reach out to us to learn more.