Bear Stearns 401(k)s Go Poof!


Some Bear Stearns (BSC) employees have learned the hard way that putting all their eggs in one basket is not the best plan.  Especially when it comes to a retirement nest egg.

While J.P. Morgan Chase & Co.'s (JPM) deal to buy the failing brokerage for $2 helped save the company, it did a number on the retirement plans of Bear's 14,000 employees, who collectively owned one-third of the firm's shares.

Just a year ago, Bear Stearns shares were worth $160 putting the employee’s stake in the company at more than $6.3 billion.  However, the discount sale now values Bear Stearns at $79 million, which is just a portion of the cost of the Madison Avenue building that houses the headquarters of the company. 

Printed reports of Bear Stearns employees and retirees losing huge chunks of their company stock-based retirement holdings are already common. In one report, an employee for nine years said he recently lost $600,000 in Bear Stearns stock. Another seven-year veteran says she lost $400,000.

The lesson to be learned: diversify, diversify, and diversify.  Hindsight may be 20/20 but this is certainly an example of the importance of diversifying retirement investments.  “There is an extraordinary amount of risk in investing solely in company stock,” says Mark Singer, a certified financial planner with Safe Harbor Retirement Planning outside of Boston.  “And, the very best way to prevent crumbling with your company is not to have too much invested in it.”

Most employers and retirement saving plans allow for diversification in the mutual fund options that they offer.  Mutual funds are well protected from rapid depreciation because they have many different holdings so, if one company’s stock fails, it will not overwhelmingly affect the performance of the mutual fund.  “You should have no more than 10%-20% in any specific stock,” says Singer.  “You should then choose a mutual fund that compliments your current stock holdings.  For instance, if you have Bear Stearns stock, the mutual fund that you choose should not be investment bank heavy.”

The wisest decision in diversifying retirement investments however, may be turning to a financial professional for guidance. Tom Foster, an ERISA attorney and retirement plan expert for The Hartford says, “Most [401(k)] participants are not investment specialists so they should work with someone who can help them look at their investments in relation to their goals.”  Speaking with a professional is important now more than ever because retirement planning has moved away from pension plans and employer directed plans to plans where the participant is responsible for most of the decisions.

Also, people must realize that company loyalty should be demonstrated in ways other than having a large portion of their net wealth invested in their employer's stock. "If the company goes under, they’re already going to lose their source of income; they needn’t lose their life savings as well," says  Tim Maurer, Director of Financial Planning at the Financial Consulate in Baltimore, Md. "Diversifying away from too much concentrated publicly traded stock exposure is not disloyal; in most cases it’s just smart.”



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