California Retailing Shake-Up : Beleaguered Broadway Workers Learn Lesson About Company Stock

A lot of people lost money investing in shares of Broadway Stores and its predecessor chain, Carter Hawley Hale. But probably no one lost more than the employees who tried hardest to believe in their company--and who bet their retirement money on the business.

There’s a lesson here for every employee, regardless of your company or your rank: Don’t invest excessively in the stock of your own business. Keep it to a relatively small portion of your retirement funds and your total financial assets. Think about what can go wrong--because it just might.

With the planned sale of the struggling Broadway chain to Federated Department Stores, Broadway employees who owned company stock will wind up burned for the second time in four years. Here’s how:

The predecessor chain, Carter Hawley, was nearly 40% owned by employees through a profit-sharing plan that invested exclusively in Carter Hawley stock. The profit-sharing plan essentially became a shield for management in the late 1980s as it sought to fight off takeover attempts.

The more shares in the hands of employees, the harder it would be to get control of Carter Hawley. So management encouraged employees to contribute as much of their earnings as possible to the tax-deferred profit-sharing plan, says Bill Fiore, whose United Food & Commercial Workers Union represents 700 employees of Broadway’s Emporium stores in San Francisco.

“A lot of people were intimidated into going further” than they wanted in buying Carter Hawley stock, Fiore contends. Some employees dedicated as much as 12% of their annual salaries to the plan.

The shield worked--Carter Hawley escaped takeover. But by 1991, loaded with debt and with its fortunes fading, the chain filed for Bankruptcy Court protection.

For employees whose principal savings were tied up in the stock plan, the bankruptcy was devastating. Stockholders may own a company, but in Bankruptcy Court their claim on assets ranks dead last.

Carter Hawley shareholders, including employees, wound up losing almost 92% of their original equity in the company by the time it emerged from bankruptcy in 1992. To put it in dollar terms, imagine that you had $50,000 in retirement savings one day, but the next day it was worth just $4,000.

Employees with stock in the old profit-sharing plan received new Carter Hawley shares at the rate of 8.1 for every 100 old Carter Hawley shares held. The profit-sharing plan was then replaced by a 401(k) retirement savings plan set up by the reorganized company, which changed its name to Broadway Stores.

Unlike the old profit-sharing plan, which forced employees to invest exclusively in company stock, the Broadway 401(k) plan gave employees options. They could choose to invest retirement contributions in one of three mutual funds--stock, bond or money market--or in Broadway stock.

Still, the company’s contributions to the 401(k) plan were exclusively in Broadway stock. The company put in $25 worth of stock for every $100 contributed by the employee, regardless of which investment option the employee chose.

That practice of matching with company stock instead of cash isn’t unusual among 401(k) plans, but many experts say it is fading as more employees ask for the right to allocate all of their plan assets, self-contributed and company-contributed, to the assets they choose.

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In any case, any Broadway employees who decided to invest totally in company stock in the 401(k), perhaps enthused by new Chief Executive (and controlling shareholder) Sam Zell’s bullish program to revitalize the chain, have seen their assets dwindle over the past year as Broadway’s outlook has slumped again.

The company’s stock, which peaked at $17.50 in 1993, tumbled to $1.50 last week as rumors surfaced about a second bankruptcy filing.

With Federated’s agreement Monday to buy Broadway in a stock-swap deal, Broadway shares jumped $4.25 to $7.125 on Tuesday.

Broadway shareholders will get 0.27 shares of Federated for every Broadway share they own. At Federated’s closing stock price of $28 on Tuesday (down $1.50 from Monday), that means the deal is currently worth about $7.50 a share to Broadway stockholders.

That is better than being wiped out by another bankruptcy filing, of course. Still, purchases of Broadway stock made for the 401(k) plan since 1992 have mostly been made at prices well above $7.50 a share.

All of which means that Broadway employees’ 401(k) plan, to the extent that it purchased Broadway stock, has left workers with less than they might have had if the money had been invested in diversified stock mutual funds.

To add insult to injury, neither Federated nor Broadway has yet divulged whether a special preferred stock issued to the 401(k) plan by Broadway in 1992 will have any value.

The 401(k) plan holds 60% of the preferred stock, which was essentially given as a “kicker” to the plan by Broadway. The stock had no stated market price and paid no dividend, but was convertible into warrants to buy Broadway stock at $17 a piece before 1999.

With Broadway stock well below $17, the warrants have no apparent value anymore. Does that mean Federated will pay nothing for the preferred? A Federated spokeswoman on Tuesday said she couldn’t answer that question, and a Broadway spokesman also didn’t know the answer.

Hopefully, few Broadway employees were counting on the preferred stock to help pay for their golden years.

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The good news is that Broadway also has a separate pension plan for its employees. Nonetheless, financial planners say the Broadway case illustrates the greatest danger of 401(k) plans, which increasingly are replacing pension plans entirely: that employees will entrust too many of their retirement dollars to company stock instead of diversifying among various assets.

A 1994 survey by Access Research showed that fully 23% of 401(k) assets nationwide were invested in shares of the companies sponsoring the plans. In contrast, 19% of assets were invested in diversified stock funds.

The trend in recent years has been for companies to offer more options for 401(k) dollars, giving employees the chance to build a better-diversified portfolio. Even so, financial planners say many employees own too much of their own company’s stock, leaving them at serious risk if the business stumbles badly.

Especially in the case of senior executives, “we still see 40%, 50% and even 60% of people’s net worth tied up in their company’s stock,” says Kenneth J. Anderson, a tax partner at Arthur Andersen & Co. in Los Angeles. Rarely if ever, he says, is there justification to be that concentrated in a single investment, no matter what it is.

“You’re ignoring the market risk even if you understand the business risk” involved with your own industry, Anderson says.

What’s the right percentage of company stock to own? There isn’t one answer to that. Some executives, in particular, will feel pressure to have significant money tied up in their own stock.

But for the average worker, ask yourself how badly your retirement would be affected if you lost nearly every dime you have in the company stock portion of the 401(k). The chances of that may seem remote, but then, that’s probably what Carter Hawley/Broadway employees always figured.

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Strong Reaction

Broadway Stores Inc. shares more than doubled Tuesday, the first day of trading since Federated Department Stores Inc. said it would buy the chain. Monthly closes, plus Monday and Tuesday:

Monday: $2.875

Tuesday: $7.125, up $4.25

Source: Tradeline

The 401(k) Pie

How 401(k) retirement plan savings are distributed across various asset classes, according to a 1994 survey:

25%: “Guaranteed” Investments

23%: Company stock

19%: Stock funds

14%: Balanced funds

7%: Bond funds

7%: Money market funds

5%: Other

Source: Access Research Inc.