NYT/Beware Those One-Note 401(k)'s
December 2, 2001
MARKET WATCH
By GRETCHEN MORGENSON
Of all the scenes from the Enron train wreck, none is more disturbing than that of the workers dazed by the realization that their retirement plans have been destroyed by the plunge of their company's once- highflying stock.
The only sins these men and women committed were being loyal to their company and wanting their own tiny version of the riches that Enron executives habitually pocketed during their years at the company. Kenneth L. Lay has taken hundreds of millions of dollars out of Enron in recent years. Of Enron's 21,000 employees, the 12,000 or so who were in the Enron-laden 401(k) plan have virtually nothing.
Memo to Stock Market Nation: It is time to rethink the bright idea of filling 401(k) plans with company stock.
That concept was brought to you by the bull-market hucksters of the late 1990's, the all-stock, all-the-time folks who say stock options are better than cash, pro forma earnings are as good as gold, and anything goes if it helps to keep the company's stock price up.
Why not load up on company stock in your 401(k)? Diversification is for dummies. So what if employees in some plans are locked into their shares and unable to sell if the stock starts to crater? They should know better than to let their emotions rule and try to sell in bad times.
Workers of the world, wake up. You've been gulled into putting more of your eggs into one basket than even the most breathless bull would advise. As of Oct. 31, according to Hewitt Associates, 29.6 percent of 401(k) assets held in 1.5 million plans are in stock of the company sponsoring the plan. That is up from 28.4 percent at this time last year. In some high-profile companies, the proportion is even higher. At the end of last year, the most recent figures available, 46 percent of Microsoft's 401(k) plan was held in its own stock.
Few employees in these plans realize that their companies reap big benefits by loading their stock into 401(k) plans. First, the employers get a tax deduction in the amount of the contribution they make and, if the contribution is made in stock, it costs the firm nothing in cash. Neither does it show up as an expense on the income statement, which would cut the company's earnings.
Also important, said Arthur Meyers, a partner at Hutchins, Wheeler & Dittmar, a law firm in Boston, is the fact that 401(k)'s stuffed with company stock means many shares in friendly hands. And companies that prevent employees from selling until they reach a certain age or leave the firm altogether are keeping a big source of selling pressure from hitting the shares during tough times. "If the stock continues to be held by employees, it's less likely to be dumped if it starts to come down," Mr. Meyers said.
Enron prevented employees from selling the shares they had accumulated until they reached the age of 54. Although this did not save the stock from collapse, it did major harm to workers.
Enron is not alone in such a requirement. Qwest Communications, International Paper and Coca-Cola all lock workers into their 401(k) company shares until a certain age. And Procter & Gamble requires workers over 50 to hold 40 percent of their profit-sharing plan in company stock.
It is bizarre but true that no rule requires companies overseeing their 401(k) plans to diversify their holdings in a prudent fashion. "We have laws that people have to wear seat belts," said Eli Gottesdiener, at the Gottesdiener Law Firm in Washington. "We all know you're not supposed to put all your eggs in one basket. Yet nationwide we have an average of 30 percent company stock held in these plans. Isn't that evidence that something should be done to limit the amount of stock in these plans?"
Mr. Gottesdiener, who has filed a suit against Enron on behalf of workers there, identified a simple way to reduce such enormous risks: Require sensible diversification in these plans. "It will scare employers into diversifying," he said. "Right now they are encouraged to overcommit their employees to company stock. And we have a legal system that encourages employees to gamble with their retirements."
Home | Back to Business | Search | Help Back to Top
Click Here to Receive 50% Off Home Delivery of The New York Times Newspaper.
Copyright 2001 The New York Times Company | Privacy Information
nytimes.com |
