Political Returns

Washington wants to manage your 401(k) account.


Enron officially became the winter's leading media circus when Jesse Jackson, the nation's pre-eminent itinerant clown, arrived to pray with Enron's fallen CEO, Kenneth Lay, and to rally former employees. The Enron show could have been custom-choreographed for Washington: A large company, run by dishonest and greedy men, exploited weak employees. Sen. Edward Kennedy (D-Mass.) played to his home crowd in The Boston Globe. "As Enron stock fell from a high of over $90 to less than $1 a share, the company prevented workers from selling at every turn," he wrote. "As a matter of policy, Enron did not allow employees under 50 to sell the Enron stock from their 401(k) retirement plans."

Crossfire co-host Bill Press was even more over the top. "The human impact is staggering," he declared in a syndicated column. "Some 4,500 employees out of work. Tens of thousands of investors watched their Enron stock sink suddenly from $83 per share to 26 cents, wiping out $60 billion in stockholder value. And 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."

Those wronged employees and retirees are not hard to find. Fortune introduced 61-year-old Marie Thibaut, an Enron administrative assistant for 15 years. At one point, her 401(k) was worth nearly $500,000. Today it's valued at $22,000, and she has shelved plans for early retirement.

Bill Quinlan, who called it quits eight years back, appeared in The Washington Post. He kept his entire retirement portfolio invested in Enron stock. At its peak, his portfolio approached $1 million. It's not worth much today.

Tom Padgett, a 59-year-old lab analyst, showed up in the pages of USA Today and elsewhere. When he checked his 401(k) in 2000, it was worth $615,000. Today it's down to $10,000. He too replaced plans to retire with plans for another decade of work.

These stories, along with his mother-in-law's $8,000 loss, have touched President Bush. "Employees who have worked hard and saved all of their lives should not have to risk losing everything if their company fails," he declared in his State of the Union speech. Two days later he proposed new regulations for 401(k) plans.

Wipe your eyes, and keep the call for more federal controls in your throat. As usual, much is missing from this story.

Nothing in the Kennedy or Press quotes about Enron's 401(k) plan is accurate. It's not true that 11,000 employees were invested exclusively in Enron stock, and those who were chose that option. They certainly weren't forbidden to diversify. And they all still have a retirement plan, since 401(k) plans live on after companies die. Bush is right: Nobody should be forced to risk losing everything if the company he works for crashes. And nobody was.

Enron maintained a rather typical 401(k) plan for a company of its size. It offered 20 investment options, its own stock being one. It matched 50 percent of employee contributions-up to 6 percent of a salary-with Enron stock. Workers couldn't sell shares their employer gave them until they turned 50, a common restriction for gifted stock. They were not prohibited from selling stock they purchased. At the end of 2000, 62 percent of the value of employee 401(k) accounts was held in Enron stock. (This is risky but not unique. Procter & Gamble's fund is 95 percent company stock, Abbott Laboratories' is 90 percent, Pfizer's is 86 percent, and Coca-Cola's is 82 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 11 trading days, from October 29 through November 12. Enron's stock was at $13.81 when it froze the accounts. By the time 401(k) investors could sell again, the stock was at $9.98.

Notice that the stock didn't "sink suddenly," as Press claims, from $83 to 26 cents. It experienced a long, well-deserved slide over a period of many months. The restrictions on selling the gifted Enron stock didn't apply to Padgett, Quinlan, or Thibaut, except for the 11-day freeze. "My children told me I should diversify," Thibaut told Fortune. "But all the mutual funds were going down, and I just kept going up."

"I've had some good advice," Quinlan said in the Post. "They told me [to diversify]. If I would have taken it…I would have been drawing good now."

These pesky details haven't kept Washington from its favorite sport: leveraging a disaster to push for more regulation. Some, like House Minority Leader Richard Gephardt (D-Mo.), who called for creating a "universal pension system" in his response to Bush's State of the Union address, are just blowing wind. (Pressed for details, a Gephardt aid replies, "That was just rhetoric for the speech.")

Others have put their plans on paper. Sens. Jon Corzine (D-N.J.) and Barbara Boxer (D-Calif.) want to restrict the amount of one company's stock in a 401(k) plan to 20 percent, slash the tax break that companies get for matching contributions with in-house stock, and dictate that any? gifted stock could be sold after 90 days. President Bush would make companies responsible for the value of the 401(k) plans during freezes, force plans to allow participants to sell company stock after three years, and allow companies to give financial advice to 401(k) participants.

None of these regulations is necessary, and some have significant downsides. The 20-percent rule resembles good financial advice. But who's the government to tell people what to keep in their 401(k) accounts, which may be only one of many retirement vehicles for any given individual? And if you cut the tax deduction for matching 401(k) plans, more employees will find themselves in plans where their employer provides them with nothing.

If employees want to keep the value of their portfolios constant during freezes-which occur, on average, once every 15 years per plan-they can switch their balances to money market funds. Make companies responsible, as Bush wants to do, and they'll simply force employees to make such a switch. Stock prices go up as well as down. Should the government force people to get out of the market? Employers can already offer their employees financial advice, and one in five large employers does, usually by contracting with an independent source. Firms with a financial interest in the choices employees make, however, are prohibited from advising possible customers.

401(k) accounts are a wonderful accident, a product of the loophole exploitation Washington officially deplores. That section of the tax code was inserted in 1978 to let people contribute bonuses to retirement accounts and defer the tax until they took the money out. As a recent New Yorker article chronicles, an employee benefits consultant figured that if cash bonuses could be deposited, cash income could too. He designed such a plan, and the Internal Revenue Service gave it the green light. The result has been a spectacular savings vehicle, one well-suited for an age when fewer and fewer people work for large, traditional, pension-sponsoring institutions. Today 43 million people have $1.7 trillion in such plans, according to the Profit Sharing/401(k) Council. Less than 1 percent of plans offer the employee's company stock as an investment option.

Enron's 401(k) meltdown is a crisis that contains its own cure, even as it provides endless opportunities for grandstanding politicians. It shows there is no such thing as risk-free investing and broadcasts coast to coast the importance of portfolio diversification. It also undermines the so-called deep wisdom of Wall Street analysts and lavishly compensated money managers, few of whom saw through Enron's schemes.

"In a perverted way, it's been a wonderful thing for all of the other 401(k) investors," says Steve Butler, author of the 1999 book 401(k) Today and president of the Pension Dynamics Corporation, which installs and administers 401(k) plans. "It prompts everybody to focus on their own investment decisions. It also shows that you are really on your own. In the end, there's no substitute for having financial education yourself."?