Failing to Heed the Lessons of Enron

bearstearns.jpg[Cross posted on Workplace Prof Blog]

Lost in the business disaster that is Bear Stearns’ acquisition by JP Morgan Chase this past weekend is the plight of Bear Stearns employees after this collapse.

Not only our many jobs lost, but according to Lisa Fairfax at the Conglomerate Blog, a lot of these employees did not learn from the Enron debacle and had a lot of their pensions tied up in company stock:

I know we are trying to move on, but I have heard several news sources and commentators point out that Bear Stearns employees own some 1/3 of the company’s stock. That number seems striking and a bit surprising, particularly given all of the hoopla surrounding Enron and the fact that its employees held so much of the company’s stock when it collapsed. Indeed, I thought one important lesson from Enron, at least for employees, was to diversify. Apparently not. To be sure, there are many good reasons to invest in your company’s stock. Then too, a short while ago Bear Stearns did not appear like it was heading for disaster (but then again neither did Enron). Moreover, it is not clear that Bear Stearns employees have not diversified and hence perhaps there are employees who did not have their entire nest egg in the Bear Stearns basket. Unfortunately, it seems more likely that employees have once again found themselves in a situation in which they not only face potential job loss, but also the loss of their retirement.

As I tell my employee benefits law students every semester, the statistics indicate that a remarkable amount of employees believe that their safest retirement investment is their own company, based apparently on some belief that “really” know what’s going on where they work.

Workers need to resist this urge and practice fundamental modern portifolo theory with their defined contribution plans and diversify. More than that, advocacy groups, unions, and employers need to do a better job of educating their employees about what can happen when a 401(k) plan is not adequately diversified not only between sectors (financial vs. tech. vs. health), but also across investment types (bonds vs. stock, etc).

Unfortunately, to the extent that Bears Stearns workers have indeed lost their retirement savings, for a lot of them it will not be easy to make up the deficit, even by working through retirement. Expect many lawsuits to follow, including a few ERISA ones.

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1 Response

  1. Jay Levitt says:

    Is it that surprising, though?

    Bear Sterns failed because it couldn’t manage money.

    Bear Sterns is composed of its employees. Therefore, those employees, collectively, couldn’t manage money.

    Why would we expect them to make wise investment decisions with their own money? They’re demonstrably no good at that very task.