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Investing Through Your Company: The Good, the Bad, and the Ugly
SMW Women's Career & Job Advice
By Paula Santonocito, updated 10/7/2008 at 6:14:07 AM

Companies frequently offer employees investment opportunities. While programs and plans may seem attractive, it's essential to consider what investing through your company—or even in it—might mean to your financial security.

"P" Is for Perks

First, it's important to recognize that companies view investment vehicles as part of an employee benefits package. As such, companies market various programs to job seekers and workers. This isn't necessarily bad; after all, you want to be apprised of available benefits.

Popular offerings include 401(k)s, profit sharing, and employee stock purchase plans.

Participating in a 401(k) plan allows you to take a percentage of pre-tax income and invest it for retirement. An employer will sometimes match a portion of your contribution. You then choose where the money gets invested, such as in mutual funds, bonds or money market accounts. You may also have the option of purchasing your company's stock.

Profit sharing is just like it sounds. A company allows you to share in the profits. Distributions, made annually, are based on company earnings. Plans vary greatly, but you usually have the option of deferring all or a portion of your distribution and investing it. One of the investment choices, as with a 401(k), may be the ability to purchase stock in the company.

Employee stock purchase plans are often standalone as well. Although plans typically have a monthly cap, they allow employees to buy stock in the company, usually through a payroll deduction arrangement, with no brokerage fees.

Long-term Plan

Each of these investment plans offers an opportunity to slowly grow your savings. Over time, the amount you amass can be substantial.

Of course, depending on the investment vehicle, income taxes and/or penalties may apply if you want or need to access money. Therefore, it's wise to view these investments as long-term. These aren't bank accounts.

As a result, you should only sock away what you can afford to do without. When investing through your company or in it, your focus should be on the long-term.

Since your view is long-term, it's critical that you not overreact to every market swing. Sometimes your investments will go up, and sometimes they'll go down, as SMW Money Editor Martin Brown points out.

Nevertheless, it's wise to periodically review your investments and make changes to fit your situation and goals. If you're a 25-year-old employee, for example, you might be inclined to take more risks than if you're 55 with an eye on retirement.

Assessing Your Risk

And oh yes, there is risk—regardless of your age.

Investing through your company, paycheck by paycheck, or from year to year through a profit sharing plan, can be a highly effective way to build a nest egg. Many people have retired comfortably after years of participating in company-sponsored programs.

Unfortunately, if your company runs into financial difficulties, you can find yourself holding a nest without any eggs.

The collapse of energy giant Enron left many people in that position. Employees dependent on the company for income, savings, retirement, and those who owned a substantial amount of Enron stock, were left with nothing when the company went under.

Employees who worked for dot-com companies that went belly-up in the late 1990s had similar experiences.

What lesson can be learned from these extreme examples?

Although companies market their investment plans and programs, you should approach participation with a “buyer beware” mindset. Weigh your choices carefully—in the context of your life.

Are you heavily dependent on your employer for income? Is the company's retirement plan essential to your long-term security? What happens if one or both suddenly weren't available?

Owning stock in a company can prove rewarding. In addition to watching your investment grow with the company, you have the benefit of being a shareholder. In this role, you get to influence corporate direction by voting for board members, among other issues.

But what happens if your company goes through tough times? Enron is a worst case scenario, but many companies have seen their stock devalued in the current economic environment. Can you afford to wait for the stock to rebound? Equally important, do you have the wherewithal to handle financial turbulence?

Acquiring Information

Before investing through your company, or in it, take stock of the company—as well as your own situation. Do your research in order to assess risk. If necessary, seek the assistance of a financial expert.

Given today's many investment choices, companies sometimes sponsor employee financial information sessions. If your employer offers such a session, attend it and have your questions ready. Financial advice is usually available through an Employee Assistance Program (EAP) as well. Membership organizations and community associations are also sources of investment seminars.

In addition, there are many books that can help you understand your investment choices.

Single-minded women should check out “Women & Money: Owning the Power to Control Your Destiny” by Suze Orman, which covers a wide range of financial topics.

Investing through or in your company can yield good—make that great—results. But the chance for bad or extremely ugly results also exists.

By assessing investment opportunities carefully, you will enter into decisions with a clear understanding of the potential outcome—and hopefully generate greater income.

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