Advisers flummoxed by BP stock disaster

Too many employees of the energy producer had too much company stock in their retirement plans

Jul 18, 2010 @ 12:01 am

By Hilary Johnson

For financial advisers, the epicenter of the Deepwater Horizon disaster may not be the Gulf of Mexico but Whiting, Ind.

There, on the shores of Lake Michigan in the northwest corner of the Hoosier state, hundreds of longtime BP PLC employees at a legacy Amoco Corp. refinery have experienced a blowout of their retirement savings.

“I've received calls from people I don't even know asking me what they should do because 100% of their assets are in BP stock,” said Timothy J. McKenna, manager of Harvest Financial Planning LLC in Schererville, Ind., about 15 miles from the refinery. He counts about 130 BP employees and retirees among his clients.

For employees such as those who called Mr. McKenna, it may be too late to do much. BP American Depositary Receipts closed Friday at $37.10, down 38% from $59.49 on April 20, when a BP oil rig exploded, killing 11 people. The shares hit a low of $27.02 on June 25.

In some cases, advisers are recommending old-fashioned fixes. Mr. McKenna, for example, suggested that family members chip in to support their 88-year-old grandmother who had been relying on Social Security and a $1,600 quarterly dividend check, which BP temporarily suspended June 16.

Marc Ruiz, an adviser at Oak Partners Inc. in Merrillville, Ind., tried to stave off losses by selling BP shares at various points in the decline. His first trigger to sell came on news reports that the initial attempt to cap the gushing well wasn't working.

“We don't know what's going on now; we need to sell and find out later,” Mr. Ruiz recalls telling his colleagues.

At that point, he sold BP shares in discretionary accounts at $52. After speaking with clients who have non-discretionary accounts, Mr. Ruiz sold more shares at $45.

Finally, for the “big group of people who wouldn't sell,” he used a collar options strategy in which he bought puts for $30, meaning that the shares would be sold at that price, and calls at $40. Now Mr. Ruiz is waiting to see if the stock rebounds further to get as much as he can for those $40 calls, he said.

His firm counts about 60 BP refinery workers among its clients. They collectively hold about 50,000 BP shares, in and out of retirement accounts. Some who held their shares without any options strategies are just “crossing their fingers,” Mr. Ruiz said, waiting for the situation to improve and the dividend to be reinstated.

Although he always preached diversification, with an ideal of no more than 5% in one asset, Mr. Ruiz said that it was almost impossible to get BP employees to diversify.

“They have such an emotional connection to the stock,” he said, noting that owning BP shares is almost a badge of pride for some refinery workers, many of whom inherited shares from their refinery worker fathers — in addition to the shares that they own in their own accounts.

“In hindsight, we were probably not as adamant about diversifying as we should have been,” Mr. Ruiz said. “But BP was seen as a good company in the area, with a good dividend and good prospects.”

Apparently, BP itself was confident in its own prospects.

As of the end of last year, BP shares accounted for more than $2 billion, or about 29% of the company's $8.3 billion retirement plan. BP employees can choose the option of directing their retirement savings into BP shares, along with other investment choices.

BP isn't unique. Other large multinational companies such as The Coca-Cola Co. and Caterpillar Inc., for example, have far greater concentrations of their own shares in their retirement plans at 51.3% and 44.3%, respectively, according to analyses performed by sister publication Pensions & Investments.

For some advisers, BP has become the new cautionary tale.

“I used to use Enron [Corp.] as an example; now I use BP,” said Gary Busch, founder of Busch Financial Planning in Houston, who despite his best efforts couldn't get one of his BP employee clients, who works at the company's Houston office, to diversify. The client had about 25% of his assets in BP shares.

Fortunately, another client took his advice and sold all his 5,000 BP shares, which amounted to 10% of his $1.5 million 401(k) plan assets.

“My compensation package is tied to the company, and that is enough,” said the client, who asked not to be identified for privacy reasons.

“I had a friend who had gotten hurt pretty badly with Enron. Logically, I knew it was good to diversify out of it,” the client said.

“Emotionally, sometimes you wonder, but I've always taken Gary's advice, and it's always worked out well,” the client said.

E-mail Hilary Johnson at


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