Houston Chronicle
Labor Dept. will probe Enron retirement plan
01/17/03
By SHANNON BUGGS
Houston Chronicle
The U.S. Labor Department confirmed Wednesday it is investigating how Enron
Corp. handled its workers' retirement savings plans, particularly in the weeks
before the energy trading company declared bankruptcy. The department, which enforces laws governing private retirement benefit plans,
said many Enron employees lost 70 to 90 percent of their retirement assets after
the company announced it had to lower its reported profits for four years.
"Enron's employees have gotten the short end of the stick in the sudden
collapse of this company," Labor Secretary Elaine Chao said. "We are
committed to doing everything we can to help them."
But it's not clear if there is anything the government can do to assist Enron's
financially devastated workers.
Moreover, the Enron case underscores an increasing concern about 401(k) plans,
such as Enron's, where the company match to employee contributions is exclusively
in that company's stock.
Matching in company stock alone can easily lead to a violation of one of the
cardinal tenets of good investing: diversification.
A lack of diversification can make a 401(k) single-stock plan look deceptively
strong when that company's stock is soaring. But when the stock goes the other
direction, the value of diversification becomes all too apparent, as many of
Enron's workers discovered this year as its stock fell from $84 a share to less
than a dollar in a year.
Possibly thousands of Enron workers lost their retirement savings over the course
of four weeks when the company prevented them from making any changes to their
401(k) investments -- and there may not be anything illegal about that.
Federal law allows companies to prohibit transactions in 401(k) plans up to
60 days while changing plan administrators.
Enron notified employees via e-mail and letters sent to their homes that their
accounts would be frozen from Oct. 16 to Nov. 13.
The timing of the blackout coincided with Enron's announcement that it would
have to take a $1.01 billion charge to account, in part, for investment partnerships
that had not been fully explained to its shareholders.
Lawsuits filed on behalf of plan participants tend to focus on this period of
time, as well as Enron's responsibility for telling the whole truth to its employee-shareholders.
Congress has said employers have a fiduciary role to select prudent investment
options for the 401(k) plans they offer their employers, but they don't hold
employers responsible for how those investments perform. It will be up to the
courts to decide if Enron failed in any of its duties.
But the lawsuits and the horrifying tales of workers watching retirement accounts
plummet from million-dollar highs to less than a year's salary point to a broader
concern than the temporary blackout.
Traditional pension plans are barred from investing more than 10 percent of
their assets in one company's stock.
A similar law does not exist for 401(k) plans, thereby allowing employers to
load participants' accounts with its own shares and employees to increase their
risk by buying more company stock with the money they contribute.
For years, companies and their workers have enjoyed a mutually beneficial relationship
using company stock to match a portion of salary an employee defers into a 401(k)
plan.
Employees get an appreciating asset with the potential to gain more in value
than what they would have received in cash.
Employers, in turn, get to deduct the amount of the contribution on their taxes,
as well as exclude the expense from their income statements and avoid reducing
profits.
To maximize their benefits, some employers also restrict when employees can
sell the stock given in the company match. Companies say this encourages loyalty
and productivity, but also keeps the stock tied up in the hands of friendly shareholders
who are less likely to vote for a hostile takeover.
Enron generally provided a 50 percent match in stock on before-tax contributions,
up to a maximum of 6 percent of base pay. But employees couldn't sell any of
those shares until they reached the age 50.
More than 60 percent of the assets in Enron's 401(k) plan were invested in company
stock although employees had 18 mutual funds and other investment options they
could choose.
Nationwide, about 20 percent of employers offer company stock in 401(k) plans
as either a match or an investment choice. But less than half of 1 percent of
plans tell their employees when they can sell their stock, according to the Employee
Benefit Research Institute and the Investment Company Institute.
"There's nothing illegal about giving people matching contributions in
stock," said Ed Ferrigno, vice president of the Chicago-based Profit Sharing/401(k)
Council of America. "Indeed some of the (research) suggests that where the
employer provides a match in company stock, individuals are even more likely
to buy more stock on their own."
And there may lie the problem.
The institutes' research shows that participants who do not have a choice about
how they can invest the employer match put 33 percent of their account balances
in company stock, compared with 22 percent in company stock in plans where company
stock is an option but not a requirement.
Large stakes in a single stock have long worried financial planners and consumer
advocates.
In fact, investing more than 10 percent of a portfolio's assets in a single
security defies the most basic of diversification principles.
Why people take such chances vary. Part of the blame can be put on a lack of
understanding about the risks they are taking.
Some say they are too busy and never make the time to attend to their finances,
says Geordie Hrdlicka, a certified financial planner in Houston and vice president
of Wealth Development Strategies.
"A lot of people also fret about causing a big tax bill," she
said.
Hrdlicka has counseled clients who feared being fired if they started to sell
off company stock holdings.
"They didn't want to seem as if they were not supportive of the company," she
said.
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