BP Oil Spill Damage Seeps into Retirement Plans

Last Updated Jun 29, 2010 11:39 AM EDT

If you think you have plenty of reasons to hate BP, just be glad you aren't a BP employee in the U.S. or a British retiree. Financial fallout from the BP oil spill is now hitting retirement plans here and across the pond. Legal eagles in the U.S. smelling a potentially lucrative settlement are busy floating the idea that BP's 401(k) plans had a fiduciary duty to suspend investment in BP company stock given the firm's less than stellar safety record. And New York State's pension fund says it plans to sue over spill-related losses due to BP's poor management. Meanwhile U.K. retirees accustomed to collecting fat dividend checks from BP (5.6 percent yield before the spill) are howling over the hardship they face after President Obama jawboned BP into suspending its dividend. All of this puts the spotlight back on a key retirement planning mistake: Putting too much faith, and savings, in any one stock.

Company Stock: The Time Bomb in Your 401(k)
According to SEC filings, nearly 30 percent of BP 401(k) assets were invested in BP stock at the end of last year. That huge stake in company stock is now down more than $1 billion since the Deepwater Horizon disaster struck. Talk about a one-two punch. After suffering along with all of us through the 2008 bear market, BP 401(k) participants are now suffering a second bear market. The difference of course is that the latter wound is self-inflicted. Having 30 percent or more of your retirement future riding on one stock is just inviting disaster. (See: Worldcom. Enron. And now BP.)

If you currently own more than 10 percent of company stock, or any stock for that matter, you've got a ticking time bomb that could wreak havoc on your retirement plan at any moment. And plenty of you are making this very dangerous bet. According to Hewitt Associates, in 2009, company stock accounted for 18.6 percent of 401(k) assets among participants who had access to company stock. And more than 12 percent of participants had at least half of their 401(k) invested in company stocks. Come on. If you've got a big stake in any single stock: Diversify. Now.

Even Dividend Investing Requires Diversification
When I first heard British grumblings that Obama's push to suspend BP's dividend would cause undue hardship on retirees, I thought it was a bit melodramatic. But after taking a close look at the FTSE 100, the leading U.K. stock index, I had a better appreciation for how big a role BP plays in British investments. BP is the second largest piece of the FTSE 100, representing 7 percent of index assets. (HSBC is the largest constituent at 8.18 percent.) By comparison, the largest company weight in the S&P 500 is ExxonMobil at about 3 percent. Moreover, according to reports, before the spill BP stock generated one-sixth of the income for British pension funds. That's a startling dependence on one company. I'd be annoyed too if I were a British retiree. Not necessarily at President Obama, but at the fact that about 16 percent of my retirement income was riding on one stock. Yikes.

The obvious advice for your retirement planning strategy is that retirement income requires the same careful diversification as your overall investment strategy. Just ask retirees whose income stream just blew up along with BP's Deepwater Horizon.

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