Sept 21 (The Street Press) – NextEra Energy’s Employee Retirement Plan Loses $500 Million This Year Due to Risky Investments in Company Stock, Highlighting Concerns About Concentrated 401(k) Holdings.
The biggest renewable energy company in the United States, along with other energy and utility firms like Exxon and Southern Company, still encourage significant investments in their own stock within employee retirement plans.
Almost half, or close to 50%, of the investments within NextEra’s 401(k) retirement plan funded by employees are in the company’s own stock. This concentration is the highest among all 30 companies in the S&P 500 Utilities Sector. According to a Reuters analysis of 2022 financial statements, the total value of company stock within this sector amounts to $13 billion, making up about 14% of the sector’s total investments, which stand at $90.4 billion.
NextEra’s unique strategy, which goes against the advice of financial experts and isn’t widely adopted in corporate 401(k) plans, results in tax deductions for the corporate headquarters, while employees bear the full burden of risk associated with holding a concentrated position in a single company’s stock.
In contrast, a study by Vanguard Group of 5 million 401(k) participants in 2022 found that 92% of U.S. employee retirement accounts do not include their own company’s stock. Many companies either don’t offer their shares as part of these plans or impose limits on such holdings.
NextEra actively encourages its employees to invest their retirement funds in the company’s shares. The company has no set limit on how much employees can allocate to NextEra stock, matches employee contributions with company shares instead of cash, and even offers the option for workers to reinvest dividends from these holdings into more company stock, as indicated in the retirement plan’s financial statements.
When asked about its approach to using company stock in employee 401(k) plans, NextEra declined to comment. A company spokesperson stated, ‘We have nothing to offer’ on this matter.
It’s worth noting that NextEra’s heavy reliance on its own shares has been quite lucrative for its employees in the past decade. During this time, as the company experienced rapid growth, it provided a total return of 325%, outperforming the S&P 500, which yielded a return of 212%.
However, employees have faced recent setbacks as higher interest rates have raised the expenses associated with NextEra’s ambitious expansion of wind and solar energy. Additionally, in a higher interest rate environment, dividend yields from utility stocks appear less appealing to investors.
Since the end of 2021, NextEra’s stock has declined by 27%, in contrast to an 11% drop in the S&P 500 Utilities Index. This decline has significantly reduced the value of employees’ NextEra shares by over $500 million, according to the financial statements of the retirement plan.
In the previous year, employees incurred nearly $66 million in actual losses from selling their shares, as shown in the financial reports.
The Enron example is a stark reminder of the risks associated with heavy investments in a single company’s stock within retirement plans. At the end of 2000, Enron’s $2.14 billion retirement plan had a significant 62% of its assets tied up in the company’s common and preferred stock, right before the company’s downfall. Employees suffered substantial losses because they were unable to sell their shares during the period of worsening financial troubles, and many also lost their jobs.
More recently, SVB Financial Corp’s bankruptcy in March led to the near-total loss of value in the parent company’s stock, highlighting the vulnerability of such concentrated holdings in retirement plans.