BOSTON (TheStreet) -- BP's (BP) stock is tanking, and its employees' retirement savings are being dragged down with it, victims of a failure to learn from past corporate implosions.
Employees may buy in out of loyalty or optimism, and employers often use company stock for at least a portion of their matching contribution for 401(k) and other direct-contribution plans. Monsanto's ( MON) direct-contribution plan counts the company's own stock as its top investment holding at 50% of total assets, according to BrightScope, a provider of 401(k) ratings. The Procter & Gamble ( PG) Profit Sharing Trust and Employee Stock Ownership Plan, with $14.3 billion in plan assets, holds 93% of its portfolio in its common stock. The McDonald's ( MCD) Profit Sharing and Savings Plan has 53% of its $1.3 billion in assets bolstered by company shares. And the Sherwin-Williams ( SHW) Company Employee Stock Purchase and Savings Plan includes 73% of its common stock. Employees may not mind, especially when the investments are considered profit-sharing. But a case in point for the risk, especially when too much buy-in undercuts diversification: Several law firms and a handful of individual investors are suing over the impact BP's woes have wrought on their retirement plans. The BP Employee Savings Plan had $2.5 billion invested in BP stock at the end of 2009, nearly 30% of its total assets. Since the Deepwater Horizon explosion of April 20, which killed 11 workers and sent tar balls onto the beaches of every Gulf state, the stock's value has declined by more than 50%. The BP lawsuits call to mind retirement disasters brought on by the scandal-fueled demises of Enron and WorldCom. About 57% of Enron's 11,000 workers had a portion of their retirement savings invested in its stock when it lost 99% of its value in 2001. The workers lost more than $1 billion in a little more than a month. WorldCom employees lost a similar amount just as fast.
But it didn't take long for those lessons to be lost. A 2004 survey by the Employee Benefits Research Institute found that 11% of the employees it surveyed had more than 80% of their 401(k) allocated to their company's stock. According to Hewitt Associates ( HEW), company stock accounted for 19% of 401(k) assets last year. The percentage of employees who held half or more of their 401(k) plan assets in their employer's stock rose to 13% in 2009 from 9.4% a year earlier. Most experts think that's too much. Hewitt Associates promotes a 10% limit. Others lean toward the more conservative approach adopted by many pension plans and a 2% cap. Individual circumstances and needs should be part of the evaluation. If a 401(k) is only part of an overall portfolio, a higher percentage of an employer's stock may still be acceptable risk, especially if shares have performed well and the transactions are free of commissions and management fees. But there are no companies too big to flounder, and tying money up with an employer runs the risk of a double whammy -- losing both a job and the value of the retirement savings it provided. At companies using their own stock for matching contributions, workers should still try to avoid having a sizable percentage of their asset allocation tied up in that that stock. Advisers say they should sell those shares frequently and move the money into other funds, although this may depend on whether the company and plan have restrictions on when and how shares can be sold. -- Reported by Joe Mont in Boston.