Compound interest

[Jared]

Hello, this might be a dumb question but I am curious as to know if the funds that are allocated in an employee’s esop account compound as the esop matures the same way that money sitting in a 401k for many years start to compound interest? I hope that I am making sense. I have worked at this company that is employee owned for 15 years and I plan to retire there in another 25 years or so. Thank you in advance.

if I may, I only have only one more question. Do most people diversify when they are 55 and over and have been working at the esop company for over 10 years? I mean if the company has done so well for all of the years that They have been there would it be foolish not to diversify? I would hate to miss out on a much larger return by diversifying but I also realize that any company can go bankrupt and lose everything. Just wondering if there are people that ride the esop 100% until retirement.

[QDROphile]

Wow.  Your second paragraph contains the answer to your first question.  So does the Summary Plan Description, if the SPD is properly drafted.  The short, short answer to #1 is "no" and the fuller explanation is in the SPD.

[Belgarath]

In my very limited contact with ESOPs, most participants do not diversify. Many of them have regretted it. Other folks here who deal more with ESOPs will undoubtedly chime in.

[ESOP Guy]

I am not even sure I understand the first question.  Are you talking about the stock compounding or the cash in the ESOP account?  If you are asking about the stock the value of that part of the account is simply the number of shares times the price.  If the company isn't publicly traded they get an appraiser to help determine the price each year.   You should be able to see from your annual employee certificate if the number of shares you have is going up each year or not and why you are getting more of them. 

 

As for how many diversify it is a real mix.  It depends on how much stock they have and what other kinds of retirement plans they have to keep them in a good mix of investments. 

[CuseFan]

Diversifying should be a situation you explore based on your individual circumstances at the time and preferably with the help of a qualified trusted advisor, and NOT based on what "everybody else" or "most people" do because most people often make the wrong decision and for the wrong reason, even if they get lucky with the outcome. This is not a decision to be made in a vacuum - you have to consider all your retirement assets and income sources, the company's health (which may not be so apparent), and a whole host of other retirement decision tree criteria.

[Luke Bailey]

Jared, an important consideration in your decision will be whether the company also has a 401(k) or other type of retirement plan in addition to the ESOP. Obviously, if there is another type of plan and you have, or are accumulating, substantial funds in it, that already gives you a measure of diversification before you even get to the ESOP. If the ESOP is all you have, then you would have to think longer and harder about not diversifying.

[R Griffith]

I would just like to also mention the confusion about compounding.  I have heard in the past that people talk about compounding when discussing investments (see Motley Fool).  But I don't think you can consider investing and compounding in the same vein.  Compounding is when you earn money and then that money earns more money - i.e. interest in a bank account.  To a certain extent, you do get compounding due to the dividends being reinvested - which is the norm in a 401k.  But many people confuse investing with compounding, because you earned X% in Y year and then earned W% in Z year.  That is not necessarily compounding, that is just investment growth.  Especially because when you think compounding, you are only thinking about growth.  And we all know that investments don't always go up.  So please don't think your investments are having compounding growth, they just have growth (or declines).