back

The Danger in a One- Basket Nest Egg Promts a Call to limit Stock

By: Richard A. Oppel Jr.

The New York Times, December 19, 2001

Plunges in retirement accounts that were heavily invested in company stock are prompting some calls for change by employee rights groups and lawmakers.

Long considered a risky investment practice, loading up on a single company's stock has proved devastating to employees in some 401(k) retirement plans this year. Employees of Lucent Technologies, Nortel Networks, Global Crossing and other telecommunications companies found their accounts drastically depleted as the value of the companies' shares fell.

While employees are free to choose among investments in 401(k) plans, and often have many diversified mutual funds as choices, companies may offer their own stock as one of the investments. They also may make matching contributions in company stock, and some even specify that the stock cannot be sold before a certain age or for a certain number of years.

All those factors converged at Enron, where employees chose to put many of their dollars into Enron shares, on top of the company match, only to see the stock wiped out by bankruptcy.

"One issue raised by the whole Enron debacle is how realistic is this concept of do-it-yourself retirement investing," said Karen Ferguson, director of the Pension Rights Center, an advocacy group in Washington. Initially, she said, with 401(k) plans many employees thought, "everyone was going to become a millionaire." But, she continued, "something like this is a wake-up call." The heavy concentration of company stock at some companies suggests employees need new regulations to keep their investing prudent, she said, especially given the decline in old-fashioned pensions and the uncertainty over future Social Security benefits.

Senator Barbara Boxer, Democrat of California, and Senator Jon Corzine, Democrat of New Jersey, introduced legislation yesterday that would limit the amount of company stock in such plans.

Under their proposal, no more than 20 percent of 401(k) investments could be in company stock, employees would be able to switch out of company stock within 90 days, and employers' tax deductions for company stock to match employee contributions in a plan would be reduced by 50 percent to discourage the stock contributions.

In traditional pension plans, which companies oversee to provide a defined benefit to workers at retirement, no more than 10 percent of total assets can be invested in the company's stock. Defined-contribution plans, including 401(k) plans, are not now generally subject to any such limits.

At Enron, more than half of employees' 401(k) assets, or about $1.2 billion, was invested in company stock, and those shares are nearly worthless after Enron's bankruptcy filing on Dec. 2.

"We want to make sure that the life savings of our nation's workers are protected — even when an employer's stock collapses," Senator Boxer said.

Even if the senators' proposal stalls in the Republican-controlled House, employers may face other pressures to change their plans. Lawsuits brought by employees of Enron and Lucent, in particular, are being closely watched by benefit consultants and pension planners.

Until now, companies have not been considered legally responsible for losses in the plans as long as they leave the investment choices to their workers and do not commit fraud. But the new suits contend that the companies violated their fiduciary duty to their workers, and the courts may open up employers to new liability if those suits are found to have merit.

Federal Mogul, the maker of auto parts, dropped company stock from its 401(k) plan in July, citing the steep drop in its shares related to asbestos-liability fears. The company sought bankruptcy court protection in October.

James Delaplane of the American Benefits Council in Washington, which represents large employers on benefits and pension issues, termed the employee lawsuits "fairly creative claims of violation of fiduciary duty." Still, if the courts side with any of the plaintiffs, it could have a chilling effect, he acknowledged.

Though they see Enron's lessons, employer groups fret that legislation would make it much more costly for companies to operate 401(k) plans and might lead some employers to stop making matching contributions.

"We certainly don't want to take steps that would cause employers to rethink the offering of employer matches," Mr. Delaplane said. The Enron case "`raises pretty serious questions," he added, and it is fair to examine ways to remedy heavily concentrated investments in company stock. But it should not be done through overly specific laws and percentage limits, he said.

Such fears may be well grounded. Earlier this month, the Ford Motor Company suspended the match for its salaried workers of 60 cents for every $1 they contribute. Some other auto companies and a few media companies have taken similar steps.

Company’s favor using their own stock in 401(k) plans in part because of the tax breaks.

One way to change the incentive would be to cut the tax deduction for companies in half, as Senator Boxer and Senator Corzine have proposed. Along with the tax break, companies find it advantageous to put stock in the hands of loyal shareholders, especially if those shareholders are prohibited from selling for 10 years, or until say, age 50, as they are in many plans.

Yesterday, the dangers of company stock were described at a hearing before the Senate Commerce Committee, one of several panels in Congress investigating Enron's demise.

A longtime Enron employee, Charles Prestwood, who retired in October 2000, told the committee he lost most of his life savings, or about $1.3 million, in the company's collapse.

Another longtime employee who retired last year, Janice Farmer, told the senators that she lost nearly $700,000. Employees were "cheated and lied to," Ms. Farmer said.

With accounts covering 42 million American workers, 401(k) plans now hold nearly $2 trillion in retirement money. At many big corporations, employees' retirement money is invested in company stock in similar proportions as it was at Enron.

fiduciary duty." Still, if the courts side with any of the plaintiffs, it could have a chilling effect, he acknowledged.

Company’s favor using their own stock in 401(k) plans in part because of the tax breaks.

Yesterday, the dangers of company stock were described at a hearing before the Senate Commerce Committee, one of several panels in Congress investigating Enron's demise.

A longtime Enron employee, Charles Prestwood, who retired in October 2000, told the committee he lost most of his life savings, or about $1.3 million, in the company's collapse.

Another longtime employee who retired last year, Janice Farmer, told the senators that she lost nearly $700,000. Employees were "cheated and lied to," Ms. Farmer said.

About 19 percent of 401(k) plans are invested in company stock. But the average includes many small plans with relatively few assets. The big companies, which account for the bulk of 401(k) assets, tend to include company stock. Among those plans, the average is 32 percent.

In plans where the company directs part of the investment — such as through contributions matched with company stock — about 53 percent of assets are held in company stock. The figures are from a study published last month using data from the Employee Benefit Research Institute and the Investment Company Institute, which is the mutual fund industry's trade group.

The Institute of Management and Administration recently analyzed the 401(k) plans at 219 large companies with company stock and found that 25 of them had more than 60 percent of their assets in the stock. The group included Coca-Cola, Texas Instruments, the Williams Companies and McDonald's.