The battle cry for reform
Washington is rushing to reform the 401(k) system in the wake of the Enron debacle.
NEW YORK (CNN/Money) - Nothing hits home like the stories of Enron employees who lost their life savings -- more than $1 billion evaporated from the company 401(k) plan.|
The sad tale has dominated talk at the dinner table, on message boards and at Friday night Happy Hour. And now it's captivated Washington lawmakers, who drafted a string of reforms to make sure there never will be "another Enron."
Members of Congress have introduced at least a dozen bills on 401(k) reform, and President Bush last week proposed his own plan.
At stake are three issues: the amount of company stock that should be allowed in 401(k)s; the amount of control employees should have over the plans; and finally, the amount of help individuals should be allowed to receive when making retirement decisions.
While there's already been plenty of saber-rattling, it's clear that lawmakers have their hands full. Plus, they'll be facing a nervous population of retirement investors and opposition from corporate America.
"We expect over 30 bills by the time this is over," said David Wray, president of the Profit Sharing/401(k) Council, a non-profit Washington group representing companies with retirement plans. "The bills are going to pour in."
The two sides of company stock
The Employee Retirement Income Security Act (ERISA) of 1974, the main law governing retirement plans, puts a 10 percent cap on company stock in traditional pensions -- but there is no limit in 401(k)s.
In many cases, companies match employee 401(k) contributions with company stock, usually about 50 cents on the dollar up to 6 percent of annual pay. As a result, the average plan has nearly 39 percent of its assets in company stock, according to a study by the 401(k)/Profit Sharing Council.
At Enron, stock represented nearly 58 percent of the plan. At other companies, like Procter & Gamble and Abbott Laboratories, stock represents more than 90 percent. There are about 2,000 plans out of 340,000 that have the so-called "Enron problem" -- a high percentage of stock that employees can't sell for years.
Companies like to contribute stock because -- they hope -- it makes for more loyal employees. Plus, giving shares is a low-cost proposition (as opposed to cash match), and they get a tax write-off to boot.
But what happens when the stock goes bust? "The whole idea with employer equity in these plans is when times are good, everybody loves it, but when times are bad, they hate it," said John Hotz, deputy director of the Pension Rights Center, a non-profit advocacy group.
A bill by U.S. Sens. Barbara Boxer, D-Calif., and Jon Corzine, D-N.J., would limit company stock to 20 percent of a plan. Another proposal by U.S. Rep. Gene Green, D-Texas, and Rep. Peter Deutsch, D-Fla., would put the cap at 10 percent, but only on contributions made by employees.
Another bill by Rep. Phil English, R-Pa., would cap 401(k) stock at 20 percent. English is the first Republican to suggest a limit to company stock in the plans, the profit sharing council said.
The Boxer/Corzine bill would also cut in half the tax deduction companies can make on their stock contributions, intended to encourage businesses to make cash contributions instead.
Critics are already saying the bills would have side effects that would hurt, rather than help, investors. "These rigid percentage caps on stock create all kinds of problems," said James Klein, president of the American Benefits Council, a non-profit lobbying group representing large companies.
Some people, for example, might resent the government telling them how to invest. For example, if a husband has a very conservative retirement plan at work, the wife might want to load up on company stock to give their long-term savings a more aggressive edge.
And cutting the tax deduction takes away incentive for companies to match contributions. "The Boxer/Corzine bill would be the kiss of death to employer matching contributions," , Klein said. (See rebuttal to these arguments in "Corzine answers critics.")
The push for more flexibility
At Enron, employees were required to hold the stock until age 50. Enron was also changing plan administrators last fall, so it had scheduled a "lockdown," or a blackout period when nobody could make exchanges.
Nothing in ERISA regulates lockdowns or gives the right to employees to diversify their investments out of company stock.
So conditions vary from plan to plan: Some may allow you to sell after three years, while others, like Enron, won't let you sell until a certain age. The average lockdown is 7 to 10 days.
President Bush wants employees to be able to sell shares after three years, while the Boxer/Corzine bill would allow employees to sell their shares 90 days after vesting. The average vesting period is three to five years.
Yet another plan by Sens. Kay Bailey Hutchison, R-Texas, and Trent Lott, R-Miss., would also allow plan stock sales 90 days after vesting. In other respects, the Lott/Hutchison plan mirrors Bush's proposal.
By contrast, Rep. George Miller, D-Calif., introduced a bill that would cut the maximum vesting period from five years to one year. Employees could sell their shares as soon as they're vested.
A proposal by Rep. Ken Bentsen, D-Texas, would heavily regulate lockdowns to make sure no foul play is involved. Companies would have to file plans for the lockdown with the secretary of labor and follow a strict set of criteria. Companies would also have to give employees 90 days notice. English's plan would downright outlaw blackout periods.
The ABCs of retirement investing
Reformists for years have been questioning whether the average person really knows enough to make investing decisions. Yet companies rarely offer investment advice because they don't want to open themselves up to liability. Under current law, companies can offer education, but not advice.
The House last year approved a plan proposed by Rep. John Boehner, R-Ohio, that would remove the threat of liability and allow companies to provide employees with financial advice.
A Senate version by Sen. Jeff Bingaman, D-N.M., would go a step further, requiring that the advice be from an independent third party -- an institution other than the plan administrators selling investing products.
Hutchison, too, would require investing advice for employees.
Another bill by Rep. David Bonior, D-Mich., would require plan sponsors to file semi-annual statements outlining their financial health and offer education on diversification.
A bigger field of proposals
Besides stock caps and new rules about lockdowns, two other plans would provide employees more protections in cases of bankruptcy and penalize corporate insiders who sell shares when the rank-and-file can't.
Rep. Dennis Kucinich, D-Ohio, is proposing that employees be pushed to the head of the line of creditors when a company goes bankrupt, so they can recover losses from retirement plans. And Rep. Charles Rangel, D-N.Y., would charge insiders a 20 percent tax if they sold shares during a blackout period.
Of all the proposals on the table, the adviser bill seems to have the broadest support. But many people in the retirement industry are warning lawmakers to proceed cautiously.
The bills will start out in committees and members of Congress will discuss and debate each one. It's unlikely all of the plans will make it to a full House or Senate vote, and there were surely be changes along the way. Many could die in committee, in spite of the battle cry for change.
"Let's make sure abuses at Enron don't drive our retirement plans into worse potholes down the road," said Gary Kushner, a retirement consultant from Michigan. "We need to look at the big picture and go slow."
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