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Monday, December 17, 2001

By Len Boselovic, Post-Gazette Staff Writer

It's hard to determine who was hurt most by the collapse of Enron, but a good case can be made for employees of the failed Houston-based energy trader. Many of them lost 70 to 90 percent of their retirement money as the company's stock, a substantial component of their 401(k) plans, went from about $80 last Christmas to its close Friday at 63 cents.

Employees brought much of the misery upon themselves. Ignoring a cardinal rule of investing, they supplemented the shares they received from the company's matching contribution by purchasing more shares with their own 401(k) money. Of course, they might not have been so eager to buy if Enron had been forthright about the company's troubles.

They also would have sold their stock more quickly, something many Enron executives were doing long before the company's severe troubles became apparent. By the time the problems were disclosed in October, it was too late. One day after Enron announced $1 billion in third-quarter charges, the company said it wouldn't allow any trades in the 401(k) plan for about a month because it was changing plan administrators. Most 401(k) plans already restrict the sale of shares purchased with company matching contributions. In Enron's case, those shares can't be sold until an employee turns 50.

Employees have filed several lawsuits against Enron over its handling of the 401(k) plan, alleging failure to disclose the risks related to Enron stock and potential conflicts of interest among Enron executives who were trustees of the plan. One longtime employee's retirement savings went from more than $470,000 to $70,000 in little more than a month.

"This is really a tragic situation for these employees," says Karen Ferguson, director of the Pension Rights Center, a Washington, D.C., consumer advocacy group.

Such stories are bound to move Congress to action. Possible remedies include limiting the amount of company stock that can be invested in 401(k) plans and easing restrictions on selling the shares. The ideas aren't new. In 1997, most members of a U.S. Department of Labor advisory council recommended that employees be able to trade company shares after five years of service. The council also urged companies to disclose information about the stock's performance, the risks involved in owning it, and the risks of not diversifying.

Federal regulations fall far short of those recommendations. For traditional employer-funded pension plans, also known as defined benefit plans, companies are prohibited from investing more than 10 percent of the pension plan's assets in company stock. Those restrictions apply only to 401(k) plans, also called defined contribution plans, if a company requires employees to buy company stock with their own money. If employees can choose between company stock and a host of other choices, they're free to buy all the stock they want.

In other words, there are more protections when an employer's money is on the line.

"Why you don't have that same limit when the employee has the risk, I just can't fathom," says Norman Stein, a University of Alabama law professor who testified before the council four years ago.

The 401(k) plans of Western Pennsylvania employers are all over the board when it comes to how matching contributions are invested and when those shares can be sold.

Allegheny Technologies gives employees a choice of how the company match is invested, and shares purchased with company funds can be sold at any time.

"We look at it as the employee's money," says spokesman Dan Greenfield.

Only 25 percent of Michael Baker Corp.'s matching contributions goes toward company stock. The rest is invested based on the employee's decision. All of the matching contributions of U.S. Steel, Alcoa, Mellon Financial, PPG Industries and DQE are in company stock.

As for selling shares purchased with company funds, U.S. Steel has no restrictions. Alcoa allows employees to transfer stock from matching contributions to other investments after the stock has been in their account for two years. Michael Baker employees can reallocate 25 percent of the shares between the ages of 50 and 54, 50 percent between 55 and 59 and all of it once they turn 60.

Mellon and PPG employees can begin reallocating the company shares once they turn 55. So can DQE's nonunion employees who are 55 and have 10 years of service. However, the utility's unionized workers can only cash in their stock when they leave the company.

Just what will come of the Department of Labor's investigation of Enron's handling of its retirement plans isn't clear. If Stein had his way, there would be no company stock in 401(k) plans because they subject an employee's job and retirement to the same risk.

"You certainly don't want your human capital tied up with your investment capital," he says.

The Profit Sharing/401(k) Council of America, a trade group for companies that offer the benefit plans, wants Congress to wait for the results of the inquiries before deciding whether regulations need to be strengthened. The trade group says Congress has a clear policy of encouraging employees to own stock in the companies they work for.

"The existing rules strike a careful balance between that goal and prudent retirement investment," PSCA said.

I'm sure Enron employees don't have as much respect for "existing rules." Clearly, rolling the dice and loading up on company stock can lead to a very comfortable retirement. Just ask Microsoft's longtime employees. But for every Microsoft, there is at least one Enron out there.

While the federal government assigns the blame and decides what's to be done about this tragedy, consider it a cheap reminder about the value of not putting all of your eggs in one basket.

Len Boselovic can be reached at lboselovic@post-gazette.com