Retirement > 401(k)s & IRAs
Company stock slams 401(k)s
graphic December 10, 2001: 11:59 a.m. ET

Enron employees have lost about $1 billion in their 401(k) plan. Here's how to make sure you don't get stung.
By Martine Costello
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NEW YORK (CNN/Money) - When times were good at Enron, employees like Bill Quinlan never had to worry about the future.

Quinlan, who pumped gas on a stretch of pipeline for 30 years, faithfully added Enron shares to his 401(k). And as the stock soared 1,400 percent in the 1990s, Quinlan accumulated a nest egg of more than $1 million. But now that Enron is in bankruptcy, Quinlan's account has plunged to around $10,000.

All told, some 11,000 Enron employees lost about $1 billion within six weeks in October and November as shares sank from the $30s to pennies.

"I just kept my money in stock. It was such a good company that I stuck with it," said Quinlan, 65, a soft-spoken man with a courtly manner. "I just didn't keep track of the business end. But I have a small pension and Social Security. The Good Lord willing, we'll survive."

The stock losses may have destroyed thousands of retirement dreams, but that isn't the end of the story. The U.S. Department of Labor is investigating whether Enron violated any laws when it froze assets in the 401(k) plan as the stock plummeted. And employees have filed at least three lawsuits, alleging Enron breached its fiduciary duty by failing to warn them about the stock's risk and even encouraging them to invest more.

Enron's fall from grace highlights some of the flaws in the 401(k) system. Nobody seemed to notice the problems -- or maybe they didn't care -- when times were good on Wall Street. For individual investors, it's a cautionary tale on the importance of having a diversified portfolio.

401(k)s head to court

The Enron case isn't the first time that employees have brought their 401(k) grievances to court. Most recently, employees at Lucent Technologies sued after the company stock in their 401(k) plunged about $900 million.

"This is where the hot litigation is in the 401(k) world," said John Hotz, deputy director of the Pension Rights Center, a non-profit Washington, D.C. advocacy group. "It shows the weakness in the 401(k) structure for sure."

The lawsuits are based on the Employee Retirement Income Security Act (ERISA) of 1974, which says 401(k) plan sponsors have the fiduciary responsibility to provide prudent, diversified investing options.

The law does not restrict the amount of company stock you can put in your 401(k), although the company can impose limits, Hotz said. The law also allows employers to make their matching contributions to your plan all in stock, rather than cash. The company match is usually about 3 percent of your annual salary.

The lawsuits haven't had much success because plantiffs must prove the stock was a shoddy investment -- a high standard, said Eli Gottesdiener, a Washington, D.C. attorney who represents employees at Enron in one of the cases.

"These lawsuits are difficult to bring, because when the stock goes south, you can't argue there was too much stock," Gottesdiener said. "You have to argue the stock was inherently a bad stock...That's difficult to prove unless you have accounting irregularities." The Enron case easily clears that hurdle, according to Gottesdiener.

Lynn Lincoln Sarko, a managing partner at the Seattle law firm Keller Rohrback, which is representing some of the Enron employees in another case, said the company had a conflict of interest and should have pulled the Enron stock as an investing option. "They knew it wasn't a prudent investment but they allowed Enron to be an investing option and they allowed people to continue to invest in the plan."

In addition, the company touted the stock 'through a variety of overt and covert means," Sarko said. Not only was the company match all in stock, but the corporate environment encouraged employees to put all of their nest egg in Enron, he said. In total, 60 percent of the plan was in company stock.

Mark Palmer, a spokesman for Enron, said the company would not comment on the claims in the suits. But he did say Enron offers 18 other investing options and he denied that the company encouraged employees to buy the stock.

Lucent spokeswoman Michelle Davidson takes similar stance. Lucent does not require or encourage employees to invest in company stock and offers 16 different mutual funds in its 401(k), Davidson said. The Lucent case is pending in U.S. District Court in New Jersey.

Lesson from Enron

According to one study by Hewitt Associates, a consultant based in Lincolnshire, Ill., about one-third of assets in 401(k)s are in company stock. The figures are based on a survey of 1.5 million plan participants.

The Enron case notwithstanding, company-stock will likely continue to be a big part of 401(k)s -- and that's not necessarily a bad thing. "Companies want employers to be aligned with the goals of the company, and [employees] want to share in the rewards," said Ed Ferrigno, vice president of the Profit Sharing/401(k) Council of America, a non-profit association in Chicago representing companies that offer 401(k)s and other retirement plans. "To say that making employees owners of companies is not a good idea because of what happened with Enron is just ridiculous," Ferrigno said.

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  graphic Ed Ferrigno comments on Enron's 401(k) situation.

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Nevertheless, there should be a limit to the amount of company stock in your plan, and individuals have to take steps to make sure they have a safe, diversified portfolio. If employees get their match in stock, they should make sure none of their other mutual funds own the stock. "You have to behave prudently as an investor. If you invest in company stock, do it with your eyes wide open," said Ferrigno.

The movement to privatize Social Security and the massive growth in 401(k)s is more a product of the 1990s bull market than a sign individual investors are up to the job of retirement planning, Hotz said. People have been lulled into a "false sense of security" that they can manage on their own.

"Certainly, if the market remains volatile, and we see enough of these Enron-like situations, where people are retiring into poverty, then we're going to see the climate shift," Hotz said. "A lot of people were hoping to retire at 45 or 50 before the market downturn. Now, they have to work another 10 to 15 years. Those years have been taken away from them." graphic

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