Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms

Wall Street employees, who dispense financial advice to individuals and companies, aren’t following a basic investing tenet with their own money: diversification.

Workers at the five largest Wall Street banks 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. Those losses don’t include shares received as bonuses.

The 2001 collapse of Enron Corp. led to warnings that tying retirement funds to an employer’s stock could be more crippling when a company fails, resulting in the loss of both a nest egg as well as a source of income. Traders and bankers felt the pain of last year’s decline in revenue from job cuts and lower bonuses in addition to the shrinking of their 401(k) accounts.

“You’re already relying on that company for your job, your income, benefits and everything else,” said Chris Baker, co- founder of Carmel, Indiana-based Oaktree Financial Advisors Inc., which manages $100 million and primarily advises employees of drugmaker Eli Lilly & Co. “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.”

Current and former Morgan Stanley employees, who receive company shares to match their 401(k) contributions, held 24 percent of retirement assets in the firm’s stock before last year’s decline, the highest percentage of any of the banks. They lost $570 million in 2011 as the shares plunged 44 percent.

Bank of America Corp. (BAC) employees lost the most, $1.37 billion, as the lender’s stock dropped 58 percent last year. Workers at JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), both based in New York, also lost hundreds of millions of dollars.

Company Stock

JPMorgan employees, some of whom received stock in the company until last year to match retirement contributions, devoted 18 percent of their funds to the lender’s shares at the end of 2010. Bank of America employees put 13 percent of their assets in the bank’s stock, while the figures for Citigroup and New York-based Goldman Sachs Group Inc. (GS) were 8 percent and 2 percent, respectively.

U.S. workers given the option of owning company stock held about 13.4 percent of their 401(k) assets in employer shares at the end of March, down from 22.4 percent at the beginning of 2006, according to data from Callan Associates Inc., a San Francisco-based investment-consulting firm.

Concentrated Position

Any amount exceeding 20 percent is deemed a concentrated position, said Jean Young, a senior research analyst at the Vanguard Center for Retirement Research, a division of Valley Forge, Pennsylvania-based Vanguard Group Inc., the biggest U.S. mutual-fund company. Baker said 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.

“It’s almost like a gamble when you have that concentration of your retirement assets invested in your employer,” Young said. “Participants do not understand the risks they’re taking.”

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, said Sandra Hernandez, a spokeswoman for New York-based Morgan Stanley.

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 provide a stock plan as an investment option.

Prudent Investment

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. The suits, beginning in December 2007, have been consolidated in federal court in New York, and 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. JPMorgan settled for $10 million a suit brought over breaches of fiduciary duty in Bear Stearns Cos.’ employee stock-ownership plan. JPMorgan purchased Bear Stearns with assistance from the Federal Reserve in 2008.

The federal Pension Protection Act of 2006 required companies to allow diversification away from company stock in 401(k) plans. Before then, employees sometimes were forced to hold employer shares they received.

‘Financially Astute’

The probability of having a concentrated position more than doubles when contributions are matched in employer shares, according to a Vanguard study. While 49 percent of employees who were in plans that offered their firms’ stock owned none, 5 percent allocated more than 90 percent of their portfolio to company stock in 2010, according to data from the Employee Benefit Research Institute, a Washington-based nonprofit.

Bank employees aren’t necessarily savvier than those in other industries, said Vanguard’s Young.

“You’re talking about large banks that have a variety of people that work there,” she said. “Even people that we’d characterize as more financially astute aren’t necessarily professional money managers.”

Shares Fall

Shares of the 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. Bank of America responded by announcing plans to cut 30,000 jobs, Goldman Sachs reduced discretionary pay by more than 26 percent, and Morgan Stanley capped cash bonuses at $125,000.

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, and those of JPMorgan, the largest U.S. bank by assets, decreased 22 percent.

While JPMorgan didn’t provide a figure in the fund’s annual report, the total value of the bank’s stock held in employees’ 401(k) plans fell more than $500 million last year. The plans bought more of the stock than they sold during 2011, according to the report. Employees received about $51 million in dividends from the shares.

Citigroup, the third-largest U.S. bank, also didn’t specify a 2011 loss tied to its own shares. The value of its stock held in employee retirement plans, accounting for purchases and sales as well as paper losses, dropped $317 million during the year, according to an annual filing. That leaves Citigroup stock held in the plans down about $1.1 billion from the price at which they were purchased, according to the filing.

Stock Bonuses

Employees typically hold the shares as long-term investments, and the losses aren’t realized unless the stock is sold. Still, financial workers are receiving more of their pay in stock. Bank of America paid traders and investment bankers who earned between $100,000 and $1 million for 2011 at least 80 percent of their bonus in company shares, people familiar with the matter said earlier this year.

Bank of America shares have rebounded in 2012, gaining 38 percent this year through last week. Goldman Sachs shares have climbed 5.6 percent, JPMorgan’s 2 percent and Citigroup’s 0.2 percent. Morgan Stanley (MS) has fallen 6.5 percent.

“The Bank of America 401(k) plan reflects the personal investment choices of our employees,” said Ferris Morrison, a spokeswoman for the Charlotte, North Carolina-based lender. “The bank offers a diversified mix of investment options, of which Bank of America stock is just one option.”

Joe Evangelisti, a JPMorgan spokesman, declined to comment, as did Citigroup’s Jon Diat and Goldman Sachs’s David Wells.

‘Something Wrong’

About one-third of almost 1,700 firms in the Vanguard study restricted the amount of company stock employees could hold. 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. Another third have either shut their employer stock funds or closed them to new investments, Young said.

Still, employers can face objections if they try to take away their own stock as an option, said Lori Lucas, defined- contribution practice leader for Callan.

“Many participants object if it’s taken away,” Lucas said. “They see it as a way to participate in the upside of the company, and it could even be perceived that there might be something wrong with the company.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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