The March 2008 downfall of Bear Stearns Cos. was only the first of several failures of erstwhile Wall Street titans. Less than six months after the investment bank had to sell itself to JPMorgan Chase & Co. for next to nothing, Merrill Lynch & Co. was acquired by Bank of America Corp., and Lehman Brothers Holdings Inc. declared bankruptcy. What brought down these and other high-profile institutions, was excessive risk and a lack of diversification—the same fatal flaws that doomed the retirement portfolios of employees at Bear Stearns and many other companies. For the Wall Street banks, the problem was massive bets on mortgage-backed securities. For the workers, it was holding too much stock in their own companies.
 We’ve been down this road before. The 2001 collapse of Enron Corp. decimated its employees’ retirement portfolios, and that outcome has repeated itself at many a corporate victim of irrational exuberance. Enron’s fall cost 5,600 people their jobs, and many had most or all of their retirement money riding on Enron stock, which became worthless when the energy company declared bankruptcy in December 2001.
(In a settlement reached in September 2008, five banks that worked with Enron agreed to pay a record $7.2 billion to some investors, who will get an average of $6.79 per share of common stock. At Enron’s peak, shares had sold for more than $90.)
When Bear Stearns was sold, the investment bank’s 14,000 employees owned one third of the firm’s stock, which had plummeted by 80% in preceding months. And more than 24,000 Lehman executives and workers may have lost most of their savings when their employer went bankrupt.
That’s the double whammy—losing a job and your savings—that can hit people who devote too much of their portfolios to shares in their own companies. What can make matters even worse is a tendency to invest additional assets in the same industry. Imagine the Bear Stearns employee who had supplemented a retirement plan loaded with Bear stock with holdings in Lehman Bros. and Merrill Lynch. Companies, of course, tend to encourage employees to invest where they work, often matching 401(k) contributions and paying bonuses in company shares. They may also restrict workers from diversifying out of concentrated positions. Yet, as these unfortunate examples prove once again, finding a way to create a broadly diversified retirement portfolio needs to be every investor’s top priority. There are many ways to mitigate an over-reliance on stock in your company, and we can work with you to make sure you won’t suffer the same fate as your firm if it’s pulled down during these difficult times. |