Concentrated Employer Stock at Age 58
Sofia, 58, is a division president at a public company. Her compensation includes $2.1 million of employer stock with a $300,000 basis, a $700,000 401(k) invested 80% in company stock, and a $250,000 taxable brokerage account. Her target allocation is 60% stocks and 40% bonds, but she says she is comfortable because the company is not going anywhere. She plans to retire at 62, has $150,000 of cash, and wants to leave $500,000 to her alma mater. Her 401(k) plan offers a stable-value fund and a broad index fund. She is subject to insider-trading windows and has unvested restricted stock units. She asks whether she should sell all the stock now, use an exchange fund, or wait until retirement.
1. Quantify Sofia's concentration risk and explain why it matters.
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Employer stock exposure is $2.1 million in the taxable account plus 80% of the $700,000 401(k), or $560,000-a total of $2.66 million. Total investable assets are $2.1 million + $700,000 + $250,000 + $150,000 cash = $3.2 million. Employer stock is about 83% of investable assets, and about 91% excluding cash.
A 50% decline in the stock would destroy about $1.33 million-more than her entire 401(k) and taxable account combined. Her human capital, salary, and unvested restricted stock units are also tied to the same company. That is undiversified idiosyncratic risk, not a diversified equity allocation. Waiting until retirement does not reduce the risk; it concentrates it closer to the point when she needs liquidity.
2. Compare selling now, using an exchange fund, and waiting until retirement.
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- Sell in tranches now. Use a Rule 10b5-1 plan and trade within insider-trading windows. Spread sales over 12 to 24 months to manage taxes, optics, and price risk. This is the cleanest way to reduce risk, but it triggers tax on the gain.
- Exchange fund. Contributes stock and receives a diversified basket, deferring gain. It requires a long lock-up, typically seven years, charges fees, and may not fit her retirement liquidity needs. It also does not eliminate the need to diversify the 401(k).
- Wait until retirement. This leaves 83% of investable assets in one stock for four more years. It may also concentrate sales into a short window when she has less human capital to recover from a decline.
- Charitable remainder trust or donor-advised fund. A CRT can sell the stock inside the trust, pay her income, and provide a deduction, but it is irrevocable. A donor-advised fund can fund the $500,000 charitable goal with low-basis shares and accelerate the deduction, but only for the charitable portion.
Recommendation: diversify the 401(k) immediately, adopt a 10b5-1 plan for staged taxable sales, and use a donor-advised fund or CRT for the charitable intent.
3. How should Sofia change her 401(k) and asset location, and what tax issues should be modeled?
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Move the 401(k) out of company stock into the broad index fund and stable-value fund. Keep tax-inefficient bonds in the 401(k) and tax-efficient equity index funds in the taxable account. Hold cash for spending and emergency reserves.
Model the tax cost of diversification. Her basis is $300,000 on $2.1 million, so the gain is $1.8 million. At a 23.8% federal rate plus state tax, the tax could exceed $430,000 if sold at once. Staged sales, charitable gifts of low-basis shares, and a CRT can manage brackets, the net investment income tax, and IRMAA. Also account for unvested restricted stock units, which will add more concentration when they vest, and for blackout windows. The goal is not to eliminate taxes but to reduce risk while keeping after-tax wealth sufficient for retirement at 62.