Jason Zweig | July 29, 2016 11:29 am ET
Image credit: “Jenga tower standing on one tile,” by Guma89, Wikimedia Commons
My column this weekend looks at overconcentration of company stock in 401(k) plans.
One recent Securities and Exchange Commission filing offers an unusually granular glimpse into how much risk some employees take with their retirement money.
At Kinder Morgan, the giant Houston-based energy pipeline and storage company, the 401(k) features a “self-directed” brokerage account. That allows Kinder Morgan’s employees to trade assets on their own and to go well beyond the usual 401(k) fare of mutual funds that invest in a broadly diversified mix of stocks and bonds.
In the company-stock plan within their 401(k), Kinder Morgan employees already held $171.5 million in KMI stock as of the end of 2014. That was 8% of the retirement plan’s total assets. By the end of last year, only $68.5 million remained.
But the company’s employees went well beyond that, the filing shows. Through that brokerage window, as of Dec. 31, 2014, Kinder Morgan workers held an additional $276,000 in KMI stock and another $14 million worth of warrants, which confer a right to buy the stock. By the end of last year, those $14.6 million in shares and warrants had shrunk to $284,000.
Kinder Morgan says that the warrants are in the 401(k) plan’s self-directed brokerage account solely as a result of its acquisition of El Paso Corp. in 2012. The only holders of the warrants are former El Paso employees who received them as a small part of the deal. Buying additional warrants or Kinder Morgan stock is not an option in the brokerage portion of the plan for any employee.
Furthermore, as of the end of 2014, Kinder Morgan employees had also sunk nearly $1 million into other oil and gas companies, including Oneok Partners, Enterprise Products Partners and Enbridge Energy Partners, apparently on the belief that working at Kinder Morgan gave them special insight into which other energy firms would thrive.
But working in the same industry doesn’t ensure that you know which of your competitors will thrive; by the end of last year, the value of KMI employees’ total holdings in those other energy companies had fallen by 46%.
Kinder Morgan employees — or perhaps as few as one very aggressive employee — even held positions in some of the riskiest of all exchange-traded funds. As of Dec. 31, 2015, the self-directed brokerage account held nearly $64,000 in ProShares UltraShort Euro, a “leveraged inverse” ETF that seeks to gain 2% on a 1% daily decline in the value of the euro against the U.S. dollar. (It should also lose 2% on a day when the euro gains 1%.) There was also a nearly $18,000 position in ProShares UltraShort Yen, another leveraged inverse ETF that bets against the Japanese currency, and $2,700 in ProShares Ultra Silver, an ETF that aims to double the daily rise or fall in the price of silver bullion.
In 2015, the leveraged euro fund gained 18.3%, but it is down 4.8% so far this year. The leveraged yen fund, which lost 1.6% last year, is down another 27.8% in 2016. The silver fund, which lost 31.2% in 2015, happens to be up 68% this year — but its gains are swamped by the losses on the other two risky funds.
A Kinder Morgan spokeswoman says that with only 2% of the 401(k) plan’s assets in self-directed brokerage accounts, employees are exercising good judgment by participating only if they feel confident in those kinds of investment decisions.
Pistols have trigger guards for a reason. Maybe 401(k)s should come with trigger guards, too.
Source: WSJ.com, MoneyBeat blog
http://blogs.wsj.com/moneybeat/2016/07/29/piling-up-losses-in-a-self-directed-401k-account/