Company stock scorching oil industry 401(k) plans

Falling energy prices and sinking stock values in 2015 took a bite out of some 401(k) plans of oil-industry companies that offer company stock, especially those that had heavy concentrations of the investment option, a Pensions & Investments' analysis shows.

The performance of these energy company 401(k) plans highlights the frequent warnings from defined contribution industry consultants, researchers and ERISA attorneys that a big allocation to a single volatile investment can scramble the nest eggs of participants.

Many DC plan executives stress diversification to participants and try to reduce the impact of company stock on retirement accounts. But participants still hold large amounts of company stock in plans such as those for Exxon Mobil Corp. and Chevron Corp.

“If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified,” advised a December 2012 summary prospectus of the ExxonMobil Savings Plan recently e-mailed to P&I by an Exxon Mobil spokesman.

Like representatives of 11 other energy companies selected for the analysis, the spokesman declined to discuss stock-fund management strategies in the 401(k) plan. Most information for this article comes from 11-K statements filed with the Securities and Exchange Commission.

Exxon Mobil's diversification advice doesn't appear to be heeded by participants. Last year, company stock accounted for $10.72 billion, or 54.8%, of the plan's total $19.56 billion, according to the latest 11-K statement by the Irving, Texas-based company.

Last year, Exxon Mobil's 401(k) plan assets fell 11.6%; the company stock-fund assets fell 16.9%.

As the chart below illustrates, stock performance of individual energy companies fared worse than the performance of their corresponding 401(k) plan assets during 2015.

The P&I stock price chart excludes reinvestment of dividends — company stock funds offer this option — and it doesn't reflect the buying and selling within a company-stock fund during a calendar year. Many company-stock funds also hold some cash. The company-stock fund performance may vary from a company's stock price.

The charts represent a snapshot of retirement investing and company stock prices. Participants holding large amounts of company stock are at the mercy of the market. Because retirement investing requires a long-term strategy, DC experts counsel against investing heavily in company stock.

Although energy prices and many energy stocks have rebounded somewhat in 2016, the collateral damage from lower energy prices continues to affect plan participants owning company stock as well as all shareholders. Seven companies surveyed by P&I cut or reduced their common stock dividends between mid-2015 and mid-2016.

Diamond Offshore Drilling Inc. and Chesapeake Energy Corp. suspended their common stock dividends; Chesapeake also suspended its convertible preferred dividends. Those making substantial cuts in quarterly common stock dividends were: Noble Energy Inc. (44%), Anadarko Petroleum Corp. (81%), Devon Energy Corp. (75%), Marathon Oil Co. (76%) and National Oilwell Varco Inc. (89%).

Exxon Mobil raised its common stock dividend 2 cents to 75 cents per share in June. Occidental Petroleum raised its dividend to 75 cents from 72 cents in July 2015, and it will raise the dividend by another penny in October.

In addition to educating participants, DC consultants and researchers encourage sponsors to reduce the impact of company-stock funds to increase diversification and reduce fiduciary risk. Some plans have frozen the amount of company stock available to stock funds; others have placed caps on the amount of company stock in participants' accounts. Some have eliminated company-stock funds from their investment lineups; others have switched to offering cash instead of stock as a corporate match.

In its latest annual DC plan survey, Callan Associates Inc. reported that 30% of plan executives from a broad range of industries said they had placed a cap on company stock contributions in 2015. Also, 6.7% froze the amount of available company stock.

The Callan survey, published in January, noted that 73.3% of executives said they communicated diversification principles to participants and 46.7% offered tools “to improve diversification out of company stock.”

Vanguard Group Inc., Malvern, Pa., has detected efforts by sponsors and participants to reduce reliance on company stock in DC plans.

Among Vanguard client plans actively offering company stock, 82% had allocations to the option of 20% or less in 2015 vs. 73% in 2006, according to a June report. Fourteen percent had allocations of 21% to 40% last year vs. 19% of plans in 2006. Four percent had allocations exceeding 41% vs. 8% of plans in 2006.

Among participants in plans actively offering company stock, 28% invested 21% or more of their account in company stock last year vs. 38% in 2006. The Vanguard report offered several explanations of why so many participants still hold so much company stock.

“Most participants view company stock as a safer investment than a diversified equity fund,” the report said. “Another factor encouraging concentrated stock holdings is the plan sponsor's decision to make an employer contribution in company stock. This implied endorsement often leads participants to invest more of their own savings in the stock as well.”

One energy giant that stopped making its corporate match in company stock is San Ramon, Calif.-based Chevron. It ended the practice in February 2015, according to its latest 11-K statement. However, company stock still plays a giant role in its 401(k) plan.

Last year, company stock accounted for $7.08 billion, or 41.8% of the 401(k) plan's $16.95 billion in total plan investment assets. In 2014, company stock represented $8.87 billion, or 47% of assets. Between 2014 and 2015, the company-stock fund lost 20.2% of its value; overall plan investments declined by 10.2%.

National Oilwell Varco, Houston, recently took steps to reduce the impact of company stock. Effective Dec. 31, the NOV Stock Fund “will no longer be an available option when investing new participant contributions or reallocating existing funds within the plan,” said the latest 11-K statement. No explanation was provided.

Last year, company stock played a modest role in the company's 401(k) plan. The stock fund's $100.7 million in assets represented 7.2% of total investments of $1.39 billion. From 2014 to 2015, total plan investment assets dropped by 11.9%; the company stock fund fell 27.6%.

Company stock was a major component of the 401(k) plan of Occidental Petroleum Corp., Houston. Last year, the $644.3 million in company stock accounted for 39.6% of the plan's total of $1.63 billion. Between 2014 and 2015, total plan investments declined 13.2%, but the stock fund fell 19.9%.

In the 401(k) plan of Oklahoma City-based Chesapeake Energy, company stock assets of just less than $50 million accounted for 11.2% of total plan investments of $444.5 million. This percentage means “net assets available for benefits are particularly sensitive to changes in the value” of the company's common stock, Chesapeake's recent 11-K statement said.

But those comments don't tell the whole story. In 2014, company stock accounted for $217.1 million, or 37% of total 401(k) plan investment assets; and in 2013, company stock represented $387.8 million, or 46.4%. In each year's 11-K statement, Chesapeake made the same warning about stock volatility.