DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management. The endorsement effect refers to the misconception that by offering an investment as an alternative, the sponsor is implicitly endorsing it as a good investment. Note that the status quo bias refers to a lack of action on the part of the participant, while 1/n diversification heuristics refers to dividing funds equally over all investment options (not putting a disproportionate amount relative to other assets). Note that putting too much in company stock would be an example of an investor being boundedly selfish in that there does not seem to be a determination if the investment would be in the investors best interests.

Looking at Buschs allocation, he obviously has a disproportionate amount of Matrix Technologies company stock. DC participants tend to hold excess stock of the company they work for due to familiarity and a perceived endorsement by management. Familiarity refers to investors selecting stocks with which they are comfortable with or have a proximity to. If company stock is offered as an investment option in a defined contribution plan, participants may feel a sense of control or allegiance to the firm and hold more company stock than is sensible, which is an effect of familiarity. Note that Buschs assets are not equally divided among investment options, which means the 1/n diversification heuristic would not seem to apply. Status quo bias or involuntary lethargy are clearly not the best answers given the weight in company stock.

Even without direct encouragement by the plan sponsor, employees tend to invest more in their companys stock that would be warranted from a diversification standpoint. Liebs and Carsners comments are reflective of the two primary factors that contribute to DC plan participants holding company stock: the endorsement effect and familiarity bias. Liebs comment reflects the endorsement effect which refers to the misconception that by offering an investment as an alternative, the sponsor is implicitly endorsing it as a good investment. Carsners comment is reflective of familiarity bias, which refers to investors selecting stocks with which they are comfortable with or have a proximity to. If company stock is offered as an investment option in a defined contribution plan, participants may feel a sense of control or allegiance to the firm and hold more company stock than is sensible, which is an effect of familiarity.

Looking at Buschs allocation, he obviously has a disproportionate amount of Matrix Technologies company stock. In 1974, U.S. Congress enacted a law (ERISA) that prohibits investment of more than 10 percent of defined benefit plan assets in company stock, but no such law applies to defined contribution plans. The only related provision states that employers cannot force participants to invest more than 10 percent in company stock. This means that employers could force employees to hold some percentage in company stock (many companies that match employee contributions will force the employee to hold those matching contributions in company stock). There is no provision that prohibits the employee from investing any amount they want in company stock; therefore, Matrix Technologies is not in violation of ERISA requirements.