Wall Street Ignores Personal Finance 101

Employees lose $2 billion on company stock in 401(k) plans | “You’re already relying on that company for your job”

Michael J. Moore


Wall Street workers, many of whom dispense financial advice, aren’t following a basic investing tenet with their own money: diversification. Employees at the five largest Wall Street banks — JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs Group, and Morgan Stanley — saw the value of company stock in their 401(k) accounts, sometimes the biggest holding of those plans, decline more than $2 billion last year, according to annual filings.

Enron’s 2001 collapse led to warnings that tying retirement funds to an employer’s stock amplifies the misery when a company fails, resulting in the loss of both a nest egg and a source of income. “You’re already relying on that company for your job, your income, benefits, and everything else,” says Chris Baker, co-founder of Oaktree Financial Advisors. “It’s not just another stock. It can magnify the impact on your personal finances if your portfolio takes a beating and your employer isn’t doing well.” Baker says he advises clients to hold no more than 5 percent of their retirement accounts in their employers’ shares, and no more than 10 percent in any one stock.

Former and current Morgan Stanley employees, who receive company shares to match their 401(k) contributions, held 24 percent of retirement assets in the bank’s stock at the beginning of last year, the highest percentage of any of the banks. They saw the value of Morgan Stanley shares in their portfolios decline $570 million in 2011 as those shares plunged 44 percent. Bank of America employees, who put 13 percent of their assets in the bank’s stock, lost $1.37 billion last year, as the shares dropped 58 percent. The stock has rebounded 35 percent this year as of July 10.

Workers at JPMorgan Chase and Citigroup also lost hundreds of millions of dollars as the stocks declined. “It’s almost like a gamble when you have that concentration of your retirement assets invested in your employer,” says Jean Young, a senior research analyst at the Vanguard Center for Retirement Research, a division of Vanguard Group, the biggest U.S. mutual fund company. “Participants do not understand the risks they’re taking.”

The Bank of America 401(k) plan “reflects the personal investment choices of our employees,” says Ferris Morrison, a spokeswoman for the lender. “The bank offers a diversified mix of investment options, of which Bank of America stock is just one.” Joe Evangelisti, a JPMorgan spokesman, declined to comment, as did Citigroup’s Jon Diat and Goldman Sachs’s David Wells.

Shares of the five largest banks dropped in 2011 as trading plummeted late in the year and the firms faced concern that the European debt crisis would hurt U.S. investment banks. Goldman Sachs shares fell 46 percent, and the value of the bank’s stock held in 401(k) accounts fell to $61 million from $104 million. Citigroup shares dropped 44 percent. That left Citigroup shares held in the plans down about $1.1 billion from the price at which they were purchased, according to a regulatory filing.

The federal Pension Protection Act of 2006 required companies to allow employees to diversify away from company stock in 401(k) plans. Before then, employees sometimes were forced to hold on to employer shares they received. Morgan Stanley, which owns a majority stake in Morgan Stanley Smith Barney, the world’s largest brokerage, is the only one of the five firms that matches retirement contributions with company shares.

The bank gives employees $1 of its stock for every $1 put into a 401(k) plan, with a limit of $9,800 a year. Once they receive the shares, employees are free to move the funds into investments other than the stock, says Sandra Hernandez, a spokeswoman for the bank. Morgan Stanley is facing a lawsuit from former employees claiming that the firm’s stock wasn’t a prudent investment for their retirement accounts and that the risks associated with its shares weren’t disclosed adequately. Morgan Stanley in March filed a renewed motion to dismiss the complaint.

Bank of America, Citigroup, and JPMorgan have faced similar lawsuits. Bank of America’s case was dismissed in 2010. Citigroup had one consolidated complaint thrown out in 2009 and faces other claims filed last year.

Until last year, JPMorgan matched in stock unless an employee opted out. Now the company matches contributions with money invested in the same way as the employee allocates funds. The other banks offer company stock as one of the investment choices in their plans. Goldman Sachs limits its staff to investing a maximum of 20 percent of their accounts in the company’s stock fund, the only one of the five banks that discloses such a restriction.

Bank employees aren’t necessarily savvier than those in other industries, says Young. “You’re talking about large banks that have a variety of people that work there,” she says. “Even people that we’d characterize as more financially astute aren’t necessarily professional money managers.”

The bottom line Morgan Stanley employees paid a price for keeping 24 percent of their 401(k) assets in company stock: a $570 million loss last year.


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