When You're Invested Too Much in Work

As some Bear Stearns employees see their fortunes crumble, experts cry 'diversify.'

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You wouldn't choose to be a Bear Stearns employee right now. Last week the employees learned they would be acquired by fellow investment bank JPMorgan Chase and that many of them were likely to lose their jobs.

This morning they got what passes for a little good news: They learned that JPMorgan was increasing its stunningly low, initial $2-a-share offer for their Bear stock to $10 a share.

Still, that's just a fraction of the $171 a share the stock was worth at its peak in January 2007 or even the $87 it commanded last month. And Bear employees are deeply invested in their company, owning about a third of the company's stock. (Their percentage stake in the company will drop, as JPMorgan will buy 95 million newly issued Bear shares under the terms of the deal announced today.)

The Bear debacle is a reminder of the perils of being too invested in your company's stock. Following news of the original deal, financial guru Suze Orman touted diversifying your portfolio on NBC's Today show and said Bear employees' biggest mistake was owning too much of their employer's stock. "You are not to have 100 percent of all your money in your employer's stock, within your 401(k) plan," Orman said. "Didn't we learn from WorldCom?"

Maybe not. About 1.5 million Americans have 401(k) plans that are invested primarily in their employer's stock, and more than 11 million Americans participate in employee stock ownership plans, stock bonus plans, and profit-sharing plans mainly invested in their employer's stock, according to the National Center for Employee Ownership.

Employee ownership seemed to be part of the culture at Bear Stearns. The company's share of employee-owned stock was high among investment banks, says John Rich, a partner at Rich & Intelisano LLP, a law firm that represents investors and employees against financial institutions. "And they've always prided themselves on that," Rich says, noting that Bear Stearns has had a reputation as a scrappy firm with employees who've "got skin in the game."

Comparisons with employees whose retirement savings were wiped out at WorldCom and Enron may be a stretch. Corey Rosen, executive director of the National Center for Employee Ownership, writes in a commentary posted on the center's website that Bear employees last year held about $285 million in their company's stock through an employee stock ownership plan funded by the company. But it wasn't the company's main retirement plan, according to Rosen. A company-funded profit-sharing plan held about $300 million in diversified investments, and a 401(k) plan had $720 million in diversified investments.

"So from a retirement plan standpoint, Bear Stearns is not at all like Enron and some other companies several years ago where employees were heavily or primarily invested in company stock, generally in their 401(k) plans, and were left with limited or no retirement assets after their companies melted down," Rosen writes.

While employees today own about a third of Bear Stearns stock, the employee stock ownership plan accounts for only 3 percent of total shares, according to Rosen, noting that Bear had additional plans for "key" employees that may largely have benefited top-level executives. Also, of course, employees could buy the stock on their own.

David Wise, a management consultant with the Hay Group, says 401(k) plans that allow investments in company stock are actually losing favor. In 2006, holdings of company stock in 401(k) plans averaged about 11 percent of total assets, down from 19 percent in 1996, according to the Employee Benefit Research Institute.

Still, employees in financial services companies often receive significant amounts of compensation in stock, and "that's generally perceived to be a good thing," Wise says. It's largely about ownership—companies want employees to feel ownership, and shareholders want to see their interests aligned with those of employees.

But there is certainly such a thing as having too much skin in the game, Wise says. Rank-and-file employees should care how the company's stock is doing, but they shouldn't lose their shirts if it takes a dive. Like all investors, employees need to check their portfolios with an eye to diversification: If any one investment was wiped out, how would that affect the overall bottom line? The Bear Stearns case illustrates a painful scenario but also, unfortunately, a realistic one.