Concentration Risk and Retirement Readiness: A Tax-Efficient Diversification Plan for Ellen Parker
Current State of Finances
Ellen Parker, a successful executive in her early 60s, was preparing to retire after a long career with a publicly traded company. Her investment portfolio totaled just under $12 million, but more than $7.5 million of that was held in her 401(k)—with the majority concentrated in her company’s stock. The position had grown steadily over the years, and while it reflected years of loyalty and success, it now posed a serious risk to her retirement plan.
Only a small fraction of the position—less than 10%—reflected cost basis. Nearly all of the value was unrealized gain. Ellen lived in a high-tax state and had no other significant sources of retirement income or outside investments.
With more than 60% of her portfolio in one stock, Ellen knew she was overexposed. A sharp drop in that single holding could derail the life she had worked so hard to build. In fact, our analysis showed that a 50% decline in the employer stock would cut her retirement plan’s success rate nearly in half.
Ellen wanted a clear plan for how to reduce her concentration risk—without triggering unnecessary taxes or delaying her retirement.
Financial Advisor Insights: What are we thinking about?
Clarity Over Complexity
We started by analyzing how different market outcomes could impact Ellen’s plan. By stress-testing her current position, we showed her exactly how much her retirement plan depended on a single stock—and how diversification could improve both stability and flexibility.
We also reviewed how future Required Minimum Distributions (RMDs) and estate planning could be affected by leaving the concentrated stock untouched inside her 401(k).
Foundational Planning
Our team explored three paths to diversification:
Option 1: Diversify inside the 401(k)
Simple and immediate, but all future distributions would be taxed at full ordinary income rates—likely over 50% when combined with state and federal taxes.
Option 2: Rollover and Roth Conversion
Rolling the funds into an IRA and converting to Roth would hedge against future tax increases, but at a steep up-front tax cost. This approach only made sense if future tax rates rose significantly.
Option 3: Net Unrealized Appreciation (NUA)
By using the NUA strategy, Ellen could move the employer stock into a taxable account. She would pay ordinary income tax only on the original cost basis, and any future gains would be taxed at the more favorable long-term capital gains rate.
Strategy Selected
After reviewing the tradeoffs, we recommended the NUA strategy. Ellen transferred the concentrated employer stock to a taxable account and sold the appreciated portion to create a diversified portfolio—reducing her concentration risk and lowering her long-term tax exposure.
The result was a significantly more tax-efficient outcome compared to a traditional rollover and deferred distribution strategy. More importantly, Ellen gained confidence knowing her retirement plan was no longer overly dependent on a single stock—and that her financial future was now built on a more stable, diversified foundation.
What’s Next?
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