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Bush to Look at Employee Risks, but Experts Say Solutions Won't Be Easy
By:
Daniel Altman
Reacting to the destruction of the retirement savings of thousands of employees of the Enron Corporation. President Bush said yesterday that the administration would start looking at ways "to make sure that people are not exposed to losing their life savings as a result of a bankruptcy." But without changes in law and corporate behavior, the White House may have a hard time reaching that goal. Many Enron employees lost their retirement savings because the savings were tied up almost exclusively in company securities. Over half the funds in Enron's 401(k) plans for employees were invested in Enron's own shares. That situation is by no means unique, said J. Mark Iwry, a former benefits tax counsel at the Treasury Department. Survey data suggest that more than 30 percent of assets are invested in company stock at those companies that allow their stock to be included in their 401(k) plans. And in companies like Enron, where management has some influence over how employee savings are invested, slightly over half the assets on average are in company stock. Why, given the seemingly obvious benefits of diversification, would workers still end up putting so many nest eggs in the same basket? By law, companies must offer several options for 401(k) plans. But unlike traditional pension plans, which cannot put more than 10 percent of their assets in any one company, the rules governing 401(k) plans do not set limits. And many companies give their employees big incentives to buy shares with their 401(k) contributions. Companies often match employee contributions only with stock and impose limits on how soon the shares can be sold. Secretary of the Treasury Paul H. O'Neill said yesterday that he would consider ways to give American workers, more than 40 million of whom have money in 401(k) plans, more freedom to make investment decisions. But Brigitte Madrian, a professor of economics at the University of Chicago, said holders of 401(k) plans generally show little initiative. Most people stick with the default 401(k) plan set up by their company, even if that plan invests solely in the company's shares. And employees are unlikely to keep close tabs on their retirement savings, despite the possibility of a sudden collapse like Enron's. "Most people aren't in the habit of tracking their 401(k) investments on a daily basis," she said. The reasons employees buy their own companies' shares may go beyond company rules. People may simply be more confident in their employers than in the rest of the market. James Delaplane, vice president for retirement policy at the American Benefits Council, said that even though Enron employees had opportunities at certain times to diversify their savings, many still chose to invest heavily in the company's stock because of their loyalty to Enron and its past success. Sometimes, colleagues' confidence is enough. "Some employees felt social pressures to put even their own money into company stock," Ms. Madrian said. Those workers, she said, suffered the most when Enron's value crumbled. Legislation has intensified such trends, according to Mr. Iwry. He cited tax deductions on dividend payments for shares bought through employee stock ownership plans. Such plans can also offer shares at a discount. Mr. Iwry warned that measures taken to encourage diversification by employees might discourage companies from making matching contributions. A bill has already been introduced in the House that would limit the portion of a 401(k) plan that may be held in a company's own shares to 10 percent. "Legislative changes and regulatory changes can improve things," said Eric Lofgren, director of the benefits group at Watson Wyatt, a consulting firm, "but they have to be really careful. It is possible for them to do more harm than good." Mr. Lofgren said education could encourage diversification. "The risk of lack of diversification," he said, "is certainly something you want to communicate to anyone who has the option of going into one stock." Mr. Delaplane said he also preferred educational steps by companies over legislation. He said some of the damage from Enron's collapse might have been avoided if its employees had received personal financial advice from independent consultants. But such advice might not have taken account of the fact that Enron, for what it says were administrative reasons, did not allow employees to sell their stock in the 401(k) plan for a critical period when the stock price was falling. Top executives, by contrast, did not face the same restrictions on the shares they owned outside the 401(k) plan and those they had acquired through stock options. Though 401(k) plans may receive the bulk of the attention in the Enron case, at least one authority on retirement saving hopes that Mr. Bush will consider the issue more broadly. "The biggest need is to try to expand the coverage of the pension system," said James Poterba, an M.I.T. economics professor. "That typically means trying to find ways to get smaller firms and lower-wage firms to adopt more systematic retirement arrangements." Mr. Bush also promised to focus attention more broadly on disclosure of financial information. And Edmund L. Jenkins, chairman of the Financial Accounting Standards Board, said: "It is important that we have transparency of information for investors. It's a natural reaction to a situation such as Enron's for questions to be asked in this area." But "until we know what happened," Mr. Jenkins added, "it's hard to know what to address." |
