The Arizona Republic
From August 18, 2002 Print Edition
Beware of retirement plans built on stock investments
By D.J. Burrough
Special for The Republic
August 18, 2002
The ongoing wave of corporate meltdowns, especially those that have hammered
thousands of workers’ retirement accounts, has employees keeping a wary
eye on just how their companies are managing retirement plans.
When Enron Corp. collapsed late last year, it took with it more than $1 billion in retirement savings of most of its front-line employees. Some employees lost up to 90 percent of their retirement assets after the company restated its profits and its stock price tumbled to less than $1.
Enron employees are now suing the bankrupt corporation over the company stock funds in their 401 (k) plans. Employees with lucent Technologies and SBC Communications are suing their respective companies on similar grounds. What are the red flags that tell you that the company you work for is managing your retirement money in a way that’s turning your golden years into the Golden Arches years? What can you do to protect yourself?
Financial experts and employee benefits experts say the best plans have a lot of flexibility for employees, don’t lock them into holding on to company stock for years and aren’t loaded with fees. But employees have to be on guard and resist the temptation to load up on company stock even if it looks like a great bet.
What got many Enron employees into trouble was that the company placed a restriction on when they could sell company stock in their 401(k) accounts.
Enron provided a 50 percent match of employees’ 401(k) contributions in the form of Enron stock, rather than cash. Enron didn’t allow employees to transfer that stock into other investments until age 50.
“After the Enron situation there was a lot of media attention on company matching and how restrictive it was,” said Lenny Sanicola, a project manager at World at Work, a national association that lobbies for employee benefits. “Some companies have loosened up those restrictions.”
During the past few months, a number of firms have changed the rules governing the management of their 401(k) plans, including International Paper Co., Gannett Co., publisher of The Arizona Republic, Mellon Financial Corp., Walt Disney Co., AOL Time Warner and Viacom.
But the changes haven’t been sweeping. Most companies haven’t altered their 401(k) governing procedures and some have retained the stricter restrictions.
According to a recent surey by World at Work, 17 percent of corporations match employee 401(k) contributions with company stock, and 56 percent have restrictions on when that stock can be sold. Approximately 51 percent have age restrictions, 30 percent allow the sale of company-contributed stock when the employee leaves the company and 16 percent make employees hang onto it for one to five years.
The Employee Retirement Income Security Act is vague on what is acceptable when company stock is used to match employee contributions to 401(k) plans.
If your company requires long holding periods, there isn’t a lot you can do, other than to lobby with human resources to get those restrictions eased, said Stephen Barnes, head of Phoenix-based Barnes Investment Advisory.
What you can do is not
purchase any additional shares of the stock in other investment vehicles beyond
your 401(k), he said.
“It’s an easy trap to fall into,” he said. “Most people
are pretty enamored by their employer, and they are onboard with everything
going on. It becomes impossible to make an impartial judgment.”
What hurt so many Enron employees was that they were not only loading up on
the company-contributed stock in their 401(k) plan, but that they were also
buying it. When the stock price tanked, so, too, did all their investments.
Barnes recommends to
his clients that their portfolio not have more than 5 percent of any one company
stock. If the company is matching with its stock, don’t buy it on the
side.
If your retirement plan has too few investment vehicles to choose form, then
there is potential for trouble as well. You might invest in two different
mutual funds offered in your retirement plan, and those funds might be loaded
up in the same asset classes, Barnes said. You think you’ve diversified,
but the two funds might react to the market almost identically.
“If your choices are all large-cap funds, that’s not going to give you any meaningful amount of diversification,” he said.
He suggests diversifying
your mix of investment with some large-cap, small-cap, real estate investment
trust or emerging markets fund so that you’re not hurt if any one area
of the economy tumbles.