Enron's 401(k) Calamity

Enron's retirement meltdown is tragic. We don't yet know if it's criminal.

"The human impact is staggering," writes CNN's Bill Press of the Enron collapse. Press details the losses to investors and loss of jobs before landing on the 401(k) wipeout. "Those 11,000 employees whose 401(k) funds were invested exclusively in Enron—and who were forbidden by Enron's own rules from diversifying—today have no retirement plan at all."

The misinformation is staggering as well. Nothing that Press, a Democratic hack who earns his living turning every world event to partisan advantage, says about the 401(k) plan is true. Eleven thousand employees participated in Enron's plan, which offered a range of investment options. These employees were not invested exclusively in Enron stock, and they were not forbidden from diversifying. It is illegal for a company to force any employee to use more than 1 percent of salary to purchase stock, and as a practical matter, none do.

Press's claims are extreme, but not wildly unrepresentative of others made about Enron's 401(k) disaster. And people are demanding action. New York Times columnist Paul Krugman has used Enron to call into question the whole idea of defined-contribution pensions. "It's easy to make the theoretical case for defined-contribution plans," writes Krugman. But he later adds that "the sad fate of Enron's employees highlights the difference between theory and practice."

He's not alone. "One issue raised by the whole Enron debacle is how realistic is the concept of do-it-yourself investing," Karen Ferguson, director of the Pension Rights Center, told The New York Times. And members of Congress have rushed to legislate our way to financial safety. In the Senate, Jon Corzine (D-N.J.) and Barbara Boxer (D-Calif.) want to limit the amount of employer stock that can be held in 401(k) plans to 20 percent of the total investment. In the House, Peter Deutsch (D-Fla.) and Gene Green (D-Texas) want to set the cap at 10 percent.

Here are some facts. Enron maintained a rather typical 401(k) plan for a company of its size. It offered a selection of 20 investment options, Enron stock being one among them. It matched 50 percent of employee contributions up to 6 percent of salary with Enron stock. (And remember, the employee's own contribution didn't have to be invested in Enron stock.) Employees couldn't sell stock that Enron gave them until they turned 50. They were not prohibited from selling Enron stock that they purchased with their own money. At the end of 2000, 62 percent of the value of employee 401(k) plans were held in Enron stock. (This is risky, but not unique. Procter & Gamble's fund is 95 percent company stock, according to a recent survey by DC Plan Investing. General Electric's is 77 percent.)

In early 2001, Enron decided to contract out its 401(k) administration to an outside company. The transfer required a freezing of accounts, which took place over a period in October and November. The time frame is under dispute, and is the subject of many lawsuits. The company claims the period was 12 trading days, from October 26 through November 12. One employee has testified that accounts were frozen as early as September 26. One lawsuit claims that different accounts were frozen for different time periods. Another claims the lockdown started on October 17.

This general period was horrible for Enron. Some of the highlights: On October 16, it announced that it had to take a $1.1 billion charge for bad investments. On October 22, the Securities and Exchange Commission (SEC) announced a probe of Enron. On October 29, Moody's downgraded Enron's credit ratings. On October 31, the SEC upped its probe to a full-fledged investigation. On November 8, Enron reduced its claim for net income since 1997 by 20 percent.

On October 26, the day Enron claims it froze its 401(k) accounts, its stock was at $13.81. By the time 401(k) investors could sell again, the stock was at $9.98.

This lockdown is troubling, but the facts are murky. Enron claims it was routine and previously scheduled. But considering events, one would think that prudence should dictate that Enron postpone the transfer until less tumultuous times. One retiree claims Enron pushed its stock aggressively. But another retiree who left his entire account in company stock says he was advised to diversify. Did executives push stock on employees while selling from their portfolios? We'll know more someday, as the Federal Trade Commission, the Department of Labor, and a gazillion attorneys are all investigating the issue.

As crushing as these losses are, they don't impugn defined-contribution investing, which offers Americans much freedom in practice, not just in theory. And calls for more regulation will only increase administrative costs and reduce choice. What Enron's employees needed most was sound financial advice not to put all their money on one horse. This is especially true for the retirees, who, it must be noted, were free to sell their Enron stock at any point other than the lockdown period.