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December 20, 2001
Calls for 401(k) Reform
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The New York Times notes that 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.
Companies often offer their own stock as an investment option. 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.
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.
U.S. Sens. Barbara Boxer, D-California, and Jon Corzine, D-N.J., have introduced legislation 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.
- Employers' tax deductions for company stock to match employee contributions in a plan would be reduced by 50 percent to discourage the stock contributions.
Even if the senators' proposal stalls in the Republican-controlled House, employers may face other pressures to change their plans, according to the Times. 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.
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.
To read the New York Times article, click here. (Registration required.)
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