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Sell Your 401(k) Company Stock Right Now!

KMC is a reformed debtor who got religion when he married his wife of 11 years. He learned he had a hidden interest in all things personal finance. He writes about it at Advanced Personal Finance [3].

The Pension Reform Act of 2006 included lots of improvements for 401(k)s, but one of the most important is the ability to sell company matching stock. If you work for a public company, the match your employer provides in your 401(k) is almost certainly in company stock. Until now, you couldn’t do anything to diversify that investment. In other words, you couldn’t sell the company stock and invest in an index fund within your 401(k). As just about any investment advising source will tell you, diversity is a key element of sound financial planning.

Diversification is the principle that says it’s inappropriate to keep more than 10% of your portfolio in any one stock. The percentage recommended may vary by source, but the idea is the same – don’t keep all your eggs in too few baskets. In the case of company stock in a 401(k), assuming you’re currently employed by that company, you have two bets going in the same direction. Your income largely depends on the company’s fortunes and your retirement account does, too. This makes holding a large amount of stock in your own company very risky.

As of this year, thanks to the Act, you no longer have to hold company stock in your 401(k). There are two important pieces to the law in this respect. First, you must be allowed to sell the stock currently in your account after no more than three years. So in practice, you can sell one third the first year (2007), one third the second year, and the final third the year after that. Second, any future matching stock can be sold at any time.

At the beginning of this year, that’s what I did. I went to my 401(k) manager’s website and put an order in to sell the third of my currently-held stock I was eligible to sell. I also designated that future employer contributions should automatically mirror my own contribution allocations. It was easy and corrected a problem I’d seen since working at my current employer.