Enron collapse prompts review of U.S. pension rules
Advertiser News Services
The biggest bankruptcy filing in U.S. history could have lasting effects on the rules regulating company pensions and 401(k) plans.
Advertiser library photo • Nov. 28, 2001
President Bush last week ordered his economic team to undertake a review of the rules governing such plans as the investigation heats up into the collapse of Houston-based Enron Corp.
Even before Enron Corp. filed for bankruptcy, downgrades in its credit rating led some of its staff to prepare to vacate Houston headquarters. Bankruptcy wiped out retirement savings of many employees.
Enron's collapse caused many of the company's employees to lose their life's savings.
More than 60 percent of employees' retirement money was invested in Enron stock, which had tripled in less than two years to top out near $90 a share in August 2000.
But billions of dollars of stockholder assets were wiped out after reports of questionable accounting came to light.
On Nov. 8, Enron restated earnings back to 1997, a move that erased more than $580 million in reported income.
At that time, Enron employees were barred from selling company stock from their retirement accounts because of a lockdown triggered by a change in retirement plan administrators.
Since the bankruptcy filing, Enron shares have dwindled to less than $1.
Experts said the Bush team must look at several issues, including whether employees are being adequately educated about investment risk and diversification, and whether to limit the amount of company stock that employees may have in their 401(k) plans.
"They need to look at the issue of employee education," said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute in Washington, a nonprofit organization that studies employee benefits issues. "They need to be sure that individuals are getting information on such issues. These relate to education on the virtues of diversification and issues related to risk and all the investment options available in a plan."
Labor Department officials said the president's action builds on the goal of Labor Secretary Elaine Chao to protect retirement savings.
"The secretary has made retirement security one of her priorities from Day 1," said Ann Combs, assistant secretary of the Pension and Welfare Benefits Administration, which enforces the Employee Retirement Income Security Act of 1974. "We're really looking forward now to working with the task force."
The Employee Retirement Income Security Act is a federal law that sets minimum standards for most pension plans in private industry in order to protect employees in those plans.
"We want to examine broadly whether the regulation of retirement plans is adequate, to make sure that people in the future have a better understanding of the need to diversify their retirement account," Combs said.
Meanwhile, Sens. Barbara Boxer, D-Calif., and Jon Corzine, D-N.J., have introduced legislation that would limit to 20 percent the investment employees can have in any one stock in a retirement plan.
Many companies offer their stock as a matching portion of employees' 401(k) investments. Employer groups said the government has to be careful not to enact laws that would kill the incentive of employers to provide company stock.
The American Benefits Council in Washington, which represents employers and benefits experts, said it would oppose efforts to limit the amount of employer stock used to match employee contributions to retirement plans.
"We would be resistant to those fixed caps of investment in employer stock," said James Delaplane, vice president of retirement policy. "Those kinds of numerical caps could actually deter employers from offering matches."
Few companies have such limits. Only 14 percent of companies restrict the amount that employees can invest in employer stock, according to a 2001 survey by Hewitt Associates.
Still, tough economic times have prompted a few large corporations to cut or trim their matching contributions — "free money" that serves as the main draw for many employees.
As the stock market weakened, many participants saw their balances decline for the first time, according to Cerulli Associates, a consulting firm in Boston. And with large companies — such as Enron and Lucent — imploding, employees whose retirement accounts are heavily weighted with company stock can find their 401(k)s wiped out as the firm's stock price plummets.
"The employer has transferred responsibility for making investment choices from the pension committee to the employee," said Rosilyn Overton, principal of Mid-Atlantic Securities in New York City. "A whole class of people who have no knowledge of investing are now responsible for a portfolio."
Ideally, 401(k) plans are a great concept. Workers can watch their retirement savings grow as they add funds and secure company matches, allocate the money where they see fit and take the funds with them from job to job.
"Will 401(k)s help millions of baby boomers be more comfortable in retirement? Yes," said Salisbury of the Employee Benefit Research Institute in Washington.
Before these defined-contribution programs became popular in the 1980s and 1990s, only about 30 percent of employees worked at a company long enough to be covered by its pension.
Now, about 40 percent of workers are employed at companies that offer 401(k) plans, and about 75 percent of these eligible employees enroll, according to Annika Sunden, associate director for research at the Center for Retirement Research at Boston College.
Altogether, 401(k)s hold $1.7 trillion in assets.
