An Important Legacy of Enron: Enhancing Retirement Protection Through Diversification
If this were just the soap opera it often resembles, those of us watching could all rest easy. Tomorrow brings a new episode, we'd tell ourselves, a chance for those who have lost so much to come out on top in the end.
Unfortunately, what happened at Enron Corporation is very real. Just ask Charles Prestwood, who worked 33 years in the natural gas business and lost almost $1.3 million in savings. Or ask Janice Farmer, a retiree who lost nearly $700,000 in Enron stock. They and thousands like them are the little guys, the ones for whom this story has a very unhappy ending.
The scandalous actions of Kenneth Lay and Co. seem to have no bounds, and speak volumes about what must be done to protect workers in the future. Last August, Mr. Lay sent an email to his employees in which he said, "I want to assure you that I have never felt better about the prospects for the company." Nothing, of course, could have been further from the truth. Mr. Lay and his chief deputy, Jeffrey Skilling, had already cashed in $160 million worth of company stock. Further, rank and file employees were being encouraged to put more and more of their 401(k) funds into Enron stock while executives were selling their stock for millions. Workers were also frozen out of their 401(k) accounts, powerless to stop the loss of their life savings. Due to a company-imposed "lock-down," employees were unable to sell as the stock price plummeted immediately after Enron executives disclosed their $1.2 billion "mistake" in reported net worth.
There are many lessons to be learned from this corporate collapse and others such as Waste Management and ColorTile. One lesson, however, is clear. The Congress must pass, and the President must sign, comprehensive reform to protect workers' 401(k) investments.
The 401(k) program has been very successful, allowing pensioners and employers to defer paying income taxes on contributions toward retirement savings. An estimated 42 million Americans have such plans, amounting to around $2 trillion. The massive losses felt by Enron employees resulted from an overconcentration in company stock, as 62% of all assets in Enron's 401(k) plan was its own stock. And it is not just Enron. At Proctor & Gamble, nearly 95% of the assets in its 401(k) plan are company stock; at Sherwin-Williams, the number is nearly 92%, and at Coca-Cola, its 81.5%.
As many people tragically learned, this level of concentration in one stock is far too risky. It fails to adhere to a most fundamental principle of investing, diversification, and it is where reform must begin.
That's why I've introduced H.R, 3640, "The Pension Protection and Diversification Act." Introduced in the Senate by Sen. Jon Corzine, (D-NJ) and Sen. Barbara Boxer, (D-CA) it will protect workers from the risks of over-investing in one company. It places a 20% cap on the amount of a particular company's stock one can have in his or her 401(k). This is twice the amount the government allows in traditional defined benefit pension plans.
Our bill also protects workers by limiting to 90 days the amount of time employers can force an employee to hold a matching employer stock contribution. Under current law, companies can force workers to hold such stock for as long as they wish. Enron, for example, prohibited its employees from selling this stock before age 50. We also end the unfair practice of "lockdowns," which tie employees' hands, restricting their ability to manage their own portfolios.
President Bush has proposed a set of 401(k) reforms, but his approach simply does not go far enough. It would still force workers to hold stock contributed into their 401(k)'s by their employer for three years, rather than 90 days. Further, it would have done little in the case of Enron, as it only would apply to stock contributed by the company. This represents only 11% of the assets in the Enron 401(k) plan that collapsed. Thus, employees would still have lost virtually all of their retirement savings. While the President should be commended for recognizing the unfairness in allowing senior executives to sell stock while the rank and file employees face a moratorium, I believe we should go further and end altogether the practice of handcuffing any employee that wants to diversify.
While some say our approach is too intrusive and doesn't allow employees to invest as they wish, I disagree. Employees can still make private investments as they choose, but the tax benefit gained by investing through the 401(k) program will now come with a prudent and diversified investment approach for retirement.
Charles Prestwood and Janice Farmer lost their retirement savings, every penny of it. Thousands of other hard working people did too. As the Enron mess continues to play out, let's not let any other workers learn the lesson they did. Let's pass needed 401(k) reforms that will protect the little guy.