Efforts to Restrict Retirement Funds Lose Steam
Indignation Wanes as Congress Considers Limits on Company Stock Holdings
By Jonathan Weisman
Washington Post Staff Writer
Saturday, September 7, 2002;
Page A01
Congress has all but
abandoned legislative
proposals to ensure that
employee retirement funds
are not concentrated in
their employers' stock,
after hearing from
businesses that vigorously
oppose such restrictions.
The recently devastated
retirement accounts of
employees from Enron
Corp. and WorldCom Inc.
initially fueled a wave of
indignation among
lawmakers in Washington
and solemn vows to protect
their investments. But the
anger that pushed tough
new accounting standards
past corporate opponents
this summer has already
faded, lawmakers and
lobbyists say, allowing
businesses to regain their
strength on Capitol Hill.
Now, legislation taking
shape would allow
employees with company
stock in their retirement
accounts to sell it after
three years of employment,
would encourage
companies to provide more
investment advice and would prevent corporate executives
from selling company stock in secret or in periods when
employees are forbidden to sell.
But unlike federal laws covering traditional pension plans,
the new 401(k) legislation almost certainly will not
mandate diversification of investments.
"I'm not that concerned," said Bruce Josten, chief lobbyist
for the U.S. Chamber of Commerce, which lost the fight
over the accounting bill but joined a campaign against
tougher pension measures.
Consumer-rights groups, unions and retiree advocates,
which were confident that the human wreckage of this
year's huge bankruptcies would force real change to the
rules, expressed outrage.
"I think it is appalling, and I think the American people
would be appalled if they knew," said Karen Friedman,
director of policy strategies at the Pension Rights Center,
an advocacy group that supports such mandates. "It's time
for Congress to have some backbone."
The collapse of Enron and WorldCom rattled stock markets
and shook investor confidence. But those who were hurt
most might have been employees who had invested
virtually all of their retirement savings in company stock,
then lost their jobs and their nest eggs at once.
Through the bull market of the 1990s, companies became
increasingly reliant on bolstering their employees'
retirement accounts with their own stock, by matching
employee contributions with stock and by allowing
employees to buy into the companies on their own. Of the
$698 billion in assets that publicly traded companies and
their employees invested in 401(k) plans by 1998, $273
billion is in company stock.
In the bear market of 2002, such investments have been
disastrous for many workers. Osman Guven, an employee
of WorldCom and its predecessor companies for 31 years,
had a relatively diversified 401(k) account in the early
1990s. But, the San Jose systems administrator said, he
heard the pitch from executives about the company's
future. He read the memos from chief executive Bernard J.
Ebbers touting WorldCom's boundless potential, and he
saw the company's stock price rise seemingly inexorably.
Slowly, he said, he shifted his investments into WorldCom,
until his entire retirement account was bound up in
company stock.
On June 28, he was laid off with tens of thousands of other
WorldCom employees. Not only had he lost his job, he lost
$380,000 in retirement savings, as WorldCom stock
plunged toward worthlessness.
"I get up in the middle of the night saying, 'How am I going
to rebuild? What am I going to do?' " Guven said. "I'm 57
years old. How am I going to restart my whole life?"
In response to such stories, Congress and President Bush
vowed earlier this year to secure private retirement
accounts. Bush proposed three broad principles: give
employees the right to sell company-issued stock, provide
more investor education, and make sure employees have
the same rights as corporate executives.
Sens. Jon S. Corzine (D-N.J.) and Barbara Boxer (D-Calif.)
went further, moving to cap retirement-fund holdings of an
employee's company stock at 20 percent.
Guven supports such an approach, although he conceded
that his financial debacle was largely due to his naivete.
"Most people do not understand, like myself, enough about
stocks, about vulnerability," he said. "Retirement income
should be something that a person should not be allowed
to lose, no matter what."
Corporate lobbyists, Republican leaders and some
Democrats strenuously objected. Then Sen. Edward M.
Kennedy (D-Mass.) came up with a considerably weaker
proposal: A company could either match 401(k)
contributions with company stock, or it could allow
employees to invest in company stock on their own, but
not both. In effect, Kennedy's proposal would have capped
company stock at 50 to 60 percent of a retirement account.
But the idea was opposed not only by Republicans but also
by Sen. Max Baucus (D-Mont.), chairman of the Senate
Finance Committee. Business lobbyists said it would raise
costs enough to convince some employers to reduce
company contributions or withdraw their 401(k) plans
altogether.
Business groups say granting company stock makes
employees more loyal and more dedicated to their
employers' success. More to the point, by using company
stock instead of cash to match employee contributions,
corporations avoid dipping into their reserves.
"Cash is king," Josten said.
Companies also get large tax deductions, not only for
initial stock contributions but also for subsequent dividend
payments.
Kennedy is trying to preserve his proposal by giving
employers a large escape clause. Under the most recent
compromise, companies would be allowed to match with
company stock and let employees invest on their own if
they also offer a traditional pension plan, offer
independent investment advice or require employees to
approve the purchase of company stock on top of a
company stock match.
But even if that compromise survives, Kennedy conceded
that the bill that will reach the Senate floor later this
month would not have guaranteed that Guven's 401(k)
account was not over-invested in company stock.
"There are some realities that we have to deal with in terms
of people's personal desires to make independent
decisions," Kennedy said.
For proponents of more stringent measures, the problem
has been simple: For every Osman Guven, opponents have
produced an employee who got rich investing all his
retirement assets in his company.
"There are countless numbers of companies whose
employees have done very well over-investing in company
stock, Microsoft, Procter & Gamble, Kroger, and on and
on," said Rep. John A. Boehner (R-Ohio), who proposed a
House-passed bill that also avoided diversification
mandates. "There are generations of families who have
done very well over-investing."
Wanda Chalk, a 15-year Enron employee who has lost
$75,000 of retirement savings as well as her job, recoiled at
a government mandate.
"Employers have an obligation to tell employees to
diversify," she said. "But I don't think the government
should force you to stop buying."
Pension experts and retiree advocates say investor
education will do little to persuade workers to diversify
their portfolios. At best, they are just too passive, said
pension expert Shlomo Benartzi of the University of
California at Los Angeles. At worst, they're self-destructive
gamblers, Benartzi said.
A new study of 401(k) investor behavior by Federal Reserve
Board economist Nellie Liang and Scott Weisbenner, a
finance professor at the University of Illinois at
Urbana-Champaign, illustrates the problem. Logically,
employees whose employers match 401(k) contributions
with company stock would diversify their own investment
options away from company stock.
But in a study of nearly 1,000 companies, Liang and
Weisbenner found the opposite: The more company stock
an employer offered, the more company stock the
employee purchased.
"It's in the atmosphere of the company. All the feedback
you're getting in that environment is that this is a good
company that is doing well," said David Certner, a lobbyist
for AARP, the senior-citizens lobby, which favors a cap on
company stock in retirement accounts.
Stephen Vivien, a WorldCom employee in San Ramon,
Calif., whose retirement savings have plunged by
$400,000, points to e-mails, communications about stock
values, and constant company pep talks to explain why 75
percent of his 401(k) was invested in WorldCom stock. In
one e-mail that bounced around the company in 1999,
Ebbers is quoted as saying "he'll personally 'kick your butt'
if you exercise your options."
Boehner said he does not believe that such pressure is
widespread. "I'd almost guarantee there is no pressure to
buy or keep company stock," he said.
Advocacy groups scoffed at that assertion. Saying
employees will be free to sell their company stock under a
weakened bill "is like saying someone who grows up
outside of Boston's Fenway Park has a choice in what team
to root for," Certner said.
Baucus said the legislation taking shape in the Senate
would change investment behavior without mandates. The
bill would require that companies advise employees against
over-concentration in any one stock and warn them when
they are over-concentrated. The bill also would mandate
quarterly benefit statements and would make it easier for
companies to offer employees independent investment
advice.
"The academics are looking at the past, but that's the
past," Baucus said. "We're now looking toward the future,
and the rules of the road will be different."
Certner has his doubts.
"What's left is that employees will have more choice to get
out of company stock. That is a legitimate point worth
addressing," he said. "But you're not likely to prevent the
Enron kind of situation happening again. The bottom line
is, while you might have made some improvements to the
law, you will not have substantially changed the
environment that created the problem to begin with."
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