GM bondholders vs UAW retirees: a false equivalence

By Felix Salmon
May 27, 2009

If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.

By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.

The WSJ editorial page today features a complaint from one Dennis Buchholtz, however — a man who did just that:

I am an American retiree. Like many small investors, I am relying on “safe” investments…

I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.

It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.

Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.

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