The 'Enron problem'
Plenty of 401(k)s are packed with company stock. With so much at stake, supporters and critics are squaring off.
NEW YORK (CNN/Money) - In retirement circles, they're already calling it "the Enron problem."|
Like Enron, about 2,000 companies have 401(k)s jam-packed with their own stock -- and employees can't touch it for years no matter what's happening on Wall Street.
Enron's demise cost its employees more than $1 billion, inspiring three bills in Washington. President Bush has appointed a task force to study the pension laws and the Department of Labor is investigating. But opponents representing the interests of companies have been sharpening their swords.
A lot is at stake.
Reformists argue there should be a limit to the amount of company stock in your 401(k) because it's too dangerous to concentrate your retirement money in just one investment. It's a tragedy waiting to happen, they say. You might think your company's stock is great -- but that's what Enron employees thought a year ago.
Critics of reform argue lawmakers have introduced proposals without proper research, propelled only by the heartfelt stories of Enron employees who lost everything. A string of Washington think-tanks and lobby groups have commissioned studies to prove their point that the "Enron problem" is exceedingly rare. Opponents also say the federal government shouldn't be telling individuals how to invest.
A retirement plan built on one name
A recent study by the newsletter DC Plan Investing found plenty of 401(k) plans with a dangerous concentration in company stock. Out of 219 large-company plans surveyed, 25 had stock representing 60 percent or more of assets. (Enron had nearly 58 percent in company stock.)
Three companies had more than 90 percent, including Procter & Gamble, with 94.65 percent, Sherwin-Williams, with 91.56 percent, and Abbott Laboratories, with 90.23 percent.
Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI), said the "Enron Problem" is a rarity in the retirement world. The Washington non-profit research group estimates that of 340,000 companies with retirement plans, only 2,000 have a stock-laden 401(k). EBRI, which does not take sides on legislative issues, is still analyzing figures and did not provide a list of the companies.
Many of those stocks, like the rest of Wall Street, have been suffering, though nothing like the catastrophic losses of Enron.
Coca-Cola, for example, has 81.47 percent of its plan in company stock, while Texas Instruments has 75.65 percent, according to the DC Investing study. Coke shed 21.8 percent last year, while Texas Instruments gave up 40.9 percent, compared to a loss of 13 percent for the S&P 500. (Efforts to reach someone for comment at the companies were unsuccessful.)
"Obviously, diversification is key, particularly when it's your only source of retirement income," said John Hotz, deputy director of the Pension Rights Center, an advocacy group in Washington. The center would like to see a cap on company stock and a rule allowing employees to sell their shares much sooner.
Over the long term, however, employees have done well with owning stock in blue-chip companies. For example, Procter & Gamble outperformed the S&P 500 over 10, 15, 20, 25 and 30 years, according to spokeswoman Martha Depenbrock.
"We think what happened with Enron employees was horrible," Depenbrock said. "It needs to be looked at, and understood. It needs to be corrected. But until we know what happened, I can't say what the remedy should be."
(Depenbrock says DC Investing overstated the company-stock weighting in P&G's retirement plans -- she puts the figure at 91.5 percent.)
The P&G retirement program includes an employee stock ownership plan (ESOP) with a 401(k) feature. Depenbrock said employees can sell the stock in their 401(k) at any time. In the ESOP, which has a mix of common and preferred shares, employees can sell the common stock after five years, and can start diversifying their preferred shares starting at age 50.
(Procter & Gamble was ranked 4th out of the top 100 companies for employee benefits by MONEY magazine.)
"Most companies don't go bankrupt, and the stock has value in the long term," said David Wray, president of the Profit Sharing/401(k) Council, a group representing companies with plans. "Enron was an exceptional case."
A system that has worked well
It's worth mentioning why companies like to contribute stock. First, it makes for loyal employees, aligning workers' interests with the company's. And, companies can issue new shares whenever they want, so there's no outlay of cash.
And some employees might want to load up on stock, said Janice Gregory, vice president of the ERISA Industry Committee, a lobbying group representing companies with 5,000 empoyees or more. (The name comes from the Employee Retirement Income Security Act (ERISA) of 1974, the main law on retirement plans).
For example, let's say you have a couple where the husband has very conservative retirement plans. The wife has access to a 401(k) that's heavy on company stock. They might want to give their nest egg a riskier edge, Gregory said. "You can't prescribe for the whole United States of America what makes sense for people."
Gregory said lawmakers should use existing recourse in the law to address the Enron problem, not legislation. For example, The Department of Labor's Pension and Welfare Benefits Administration is investing possible civil violations in Enron's handling of the plan. The Department of Justice has launched a criminal probe.
Part of the success of the 401(k) system is that it hasn't been complicated by years of reform legislation like the traditional pension system, said Jim Klein, president of the American Benefits Council, a non-profit lobbying group representing large companies. "Many people who are calling for restrictions of company stock now are the same people a year ago when Enron was trading at $90 who would have been complaining if you didn't open the opportunity up to employees."
Klein recalled his group lobbied hard when Sen. Barbara Boxer, D-Calif., the author of one of the new bills, pushed for reform in the mid-1990s. She had proposed a 10 percent cap on company stock. The law that finally passed was a much more watered down requirement - a 10 percent cap only in cases where companies require you to invest in their stock. It's a situation that almost never occurs.
Meanwhile, the studies will start rolling out starting this week. Among the groups at work are EBRI, the American Benefits Council, the Profit Sharing/401(k) Council, the Erisa Industry Committee, World At Work, the American Society of Pension Actuaries and the National Center for Employee Ownership. Jack Van Derhei, a professor at Temple University and a pension expert, is also working on an analysis of company plans.
The challenge, said Van Derhei, is to come up with a solution that protects employees but doesn't discourage companies from contributing to their retirement plans.
"Even if it's a risky investment, you'd rather have the stock than nothing," Van Derhei said. "The original Boxer bill never made it through because history shows us that employees do want it."
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