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Retirement
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The battle cry for reform
graphic January 22, 2002: 3:27 p.m. ET

In the first installment of a continuing series, we examine Washington's rush to reform the 401(k) system in the wake of the Enron debacle.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - We watched in disbelief as the once-great Enron imploded.

We wonder why professional money managers at Janus and Merrill Lynch didn't see it coming, and try to make sense of the Andersen accounting scandal. And we even laugh a bit at the Enron "visions and values" paperweights turning up on eBay.

But nothing hits home like the stories of Enron employees who lost their life savings -- roughly $1 billion in all evaporated from the company 401(k). The sad tale has dominated talk at the dinner table, on message boards and at Friday night Happy Hour.

Now, more than 20 years since the creation of the 401(k), a period in which there's been little federal scrutiny of the system, lawmakers are springing into action.

There are four bills pending in Washington, and President Bush has appointed a task force to study the pension laws. It's sure to captivate the attention of Congress when it goes back into session Wednesday.

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  graphic CNNfn's Peter Viles takes a closer look at the 401(k) debate.

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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 will have their hands full. Plus, they'll be facing a nervous population of retirement investors and opposition from corporate America.

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.

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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, a non profit group representing companies with retirement plans. At Enron, stock represented nearly 58 percent of the plan.

Companies like to contribute stock because, they hope, it makes for more loyal employees, and because they can write off contributions as business expenses. Employees like the free shares.

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. (Boxer was author of another bill in 1996 to limit company stock that was so defanged that in the end it was virtually useless). 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.

The Boxer/Corzine bill would also cut in half the tax deduction companies can make on their stock contributions, which would encourage businesses to make cash contributions instead.

Critics are already saying the bills would have side effects that would hurt, rather than help, investors. For example, what happens if you work for a company whose stock is soaring on Wall Street? If next week the stock becomes 22 percent of your portfolio, do you have to rush out and sell shares? The bill would have to address a wide range of scenarios.

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"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. "You're discouraging employer matching, and you're imposing rules on how individuals should invest their money."

By cutting the tax deduction, it takes away incentive for companies to match contributions, Klein said. "The Boxer/Corzine bill would be the kiss of death to employer matching contributions."

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.

There is nothing in ERISA that 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.

The Boxer/Corzine bill would allow employees to sell their shares after 90 days so they could diversify into other investments. 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.

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 investor education because they don't want to open themselves up to liability.

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.

Of all the proposals on the table, the adviser bill seems to have the broadest support. But who is going to pay for that advice? Either the companies will have to shoulder the burden, at a time when corporate profits are shrinking and layoffs are on the rise. Or, they'll have to pass it on to employees.

"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." graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

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