401(k) matching contributions in company stock: Costs and benefits for firms and workers

This paper tests for important determinants of why some employers provide matching contributions for 401(k) plans in company stock. We find that firms that match in company stock have lower stock price volatility and lower bankruptcy risk and are also more likely to offer a defined benefit plan, consistent with a recognition that imposing a concentrated portfolio can be costly for employees. Evidence also indicates that firms match with company stock to help deter takeovers by putting stock into friendly hands. Simulation results suggest that while portfolio-optimizing employees are made worse off by having their match restricted to company stock, sufficiently risk tolerant employees who follow naïve investment strategies might prefer a 401(k) plan at a company with a company stock match to a plan at a company with an unrestricted match.