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Nov 5, 2008 4:04 pm

I just got off the phone with a typical $1.5MM client that is 57 and 2 years from retiring.

About 1/3 of his money is invested in his company's ESOP, which has done really well over the years.  He said within the last 3 weeks, there has been some slowdown.

So he wanted to know my opinion on this:

If by the end of their fiscal year, February 2009, the outlook for the company is negative, should he quit so that his ESOP doesn't take a huge hit. 

I don't know how much he would lose in company stock if the company did poorly.  I do know the worst case scenario is that if the company goes under, his ESOP is worthless.

I told him that by retiring at 57, we would need to pull $60,000 per year for 2 years from his accounts.  That $120k would be much more devasting than a significant loss in company stock of 15-20%.  As long as he can get the paycheck from his company, he should take it.   Any thoughts? 
Nov 5, 2008 4:25 pm

Can he sell any of the sotck, or does he have to keep it while employed?  Assuming he PAID for the stock, that’s a pretty significant investment (not sure how much is gains).  Also, would he be able to get another job to at least carry him until retirement?  I would likely NOT give up 120K on the CHANCE that his employer’s stock may lose money.  What if the entire market tanks again and takes his account with it?  What if he gets really sick and needs expensive medical care, and has to deplete far more than 60K?  I think it’s way to young to be trying to play that game (unless, again, he can get another job).

Nov 5, 2008 6:48 pm

Surely there’s some form of diversification option in his ESOP?  All the ESOPs I’ve dealt with allowed older employees (maybe he’s not old enough?) to start diversifying ESOP funds into personal IRA’s.

Nov 5, 2008 6:54 pm

He already submitted the form to allow him to diversify 25% of the account.  He declined…

  He is now calling HR to see if he can re-nig on that.
Nov 5, 2008 7:01 pm

have him take a lumpsum distribution from his esop and place the proceeds in a VA.  this will diversify his holdings and provide him some guarantees.

good luck!
Nov 6, 2008 2:07 am

I called the client back tonight after thinking about this morning’s conversation all day.  I basically was like, “WTF are you thinking?”.

  He is so concerned that this time it is really unprecedented.  So I told him what that meant, and he then says it's all about regret.   He is living in a state of regret that he should have sold out at the top when he could have, even though he knows that markets can't be timed like that.   We talked for about 45 minutes and we get into a discussion about Obama and the future and this and that.  I'm always trying to be positive, so I say things like, "Well look at how many people have been inspired.  It's times like that when people do unexpected things...hopefully for the better.  Look at alternative energy.  Maybe someday we'll see something really positive.  Even though it's a hotly debated issue, look at stem cell research.  Because of scientific improvements, people may actually live longer, etc...."   I then got into a discussion of a 60 Minutes or 20/20 episode I saw the other night.  (It's a good story too if you need one).   A neuroscientist was, of all things, diagnosed with Lou Gherig's disease.  The guy is physically unable to do anything pretty much but wink, even though his mind is still as sharp as ever.  It's a sad disease.   Anyways, he was able to do this interview, and still works as a neuroscientist writing papers (in his own way) among other things.   He wears this cap on his head and there are sensors that read certain electrodes in his brain.  The guy literally thinks of a letter, and in 20 seconds it appears on the computer.  He writes entire sentences this way.  It even worked for the reporter.   Then they go on to show how this same thing has helped monkeys think about moving an arm that isn't there, and the computer moves a robotic arm.  The monkey can eat and drink without physically having an arm.   Essentially, people that are paralyzed may someday walk again.  People that are missing limbs may have a replacement that, by their thoughts, will act like a real limb.   This stuff is amazing.  This is what drives America.  This is the innovation that changes lives.  How can anyone that hears this story think America is coming to an end?  I don't know what the next 5-10-20 years will bring, but this kind of innovation progress will sure be fun to watch.   Anyways, client was fascinated by that story, but still thinks his world is coming to an end.  How do you change such pessimism?    
Nov 6, 2008 11:59 am

Once a participant in an ESOP reaches age 55 they have the right to diversify a % of their company stock each year. There is a minimum participation requirement, the plan needs to contain 401(k) elective deferrals, some other minor considerations. See IRS Notice 2006-107

Or Google “ESOP diversification” for links the neglish versions of the IRS notice

Nov 6, 2008 4:35 pm

josephus is right.

  What I do with client who hold  comany stock is buy puts in a NQ account. 
Nov 6, 2008 5:07 pm

Snaggletooth, it sounds like this guy wants to stop working. He doesn’t regret that his investments are down, he regrets that he can’t retire.

Maybe if you show him what that scenario will look like he will either a) retire, or b) sharpen his focus on two or three years out. With $1.5 million, he should have enough for a nice retirement.    
Nov 6, 2008 8:50 pm

introduce him to a couple of AGE brokers that had tens of thousands of shares @ $60-70 last year…fast forward to september 2008 +/- $1.00

  Talk about a change in standard of living during retirement.....