TOPICS > Economy

401 (Chaos)

January 18, 2002 at 12:00 AM EDT


MARGARET WARNER: Enron’s 401(k) plan was not unusual. Some 2,000 companies, including some of the nation’s largest, match their employees’ 401(k) contributions with company stock, and let workers buy additional company stock themselves. Should something be done to change this?

We turn to Marc Machiz, former associate solicitor at the Labor Department in the Clinton administration, he is now a partner with a Washington law firm; and James Delaplane, vice president for retirement policy at the American Benefits Council, which represents employer interests in Washington.

Welcome to you both. Enron was also, I understand, not unusual in the degree of concentration that they had in these 401(k) plans. Mr. Machiz, I read, for instance that at Procter & Gamble, over 90% of their 401(k) assets are in Procter & Gamble stock or at Pfizer it’s over 80%. Is this kind of concentration, is there something inherently wrong with that?

MARC MACHIZ, Former Associate Solicitor, Department of Labor: I think there is. A long time ago, in 1974, Congress passed a law that was designed to protect employees from exactly the kind of debacle that we just heard about that occurred at Enron. The problem is that back in 1974, when they had the example of the Studebaker Company in front of them, where the workers there had been promised by the company, a pension plan when they reached retirement age, Congress was concerned about ensuring that promise but left a gigantic loophole in the law that didn’t seem so gigantic in 1974. And that allowed the concentration in the employer stock, the pension plan where workers bear the risk, rather than the companies bearing the risk.

MARGARET WARNER: So in other words, they closed the door on putting a lot of company stock in old-fashioned pension plans, but the 401(k), which is where we’re all moving to, here there are no limits?

MARC MACHIZ: There are absolutely no limits. The result is that we have today, 25 years or more after Congress acted, exactly the same problem. When a company like Enron goes under, it takes not only jobs of the workers, it takes their retirement security with them. This comes as a shock, I have to say, to absolutely no one who works in this area. It’s a scandal that has been left– it has been left this long without correction. And I certainly hope that something is done now to fix it.

MARGARET WARNER: A scandal, Mr. Delaplane?

JAMES DELAPLANE, American Benefits Council: I don’t think we know that yet. We think Enron is an aberrant situation. There are 2,000 companies. But the concentration numbers of 80% to 90% is highly unusual. In those instances, a part of the overall retirement plan is something called an employee stock ownership plan. Congress has blessed those plans and, frankly, actually given tax advantages for them.

MARGARET WARNER: Let’s look at the 401(k)s though. What is the advantage for companies, when they do this match, to do it in company stock rather than in cash, that the employee can direct the investment the way they can in other…

JAMES DELAPLANE: Sure, it is often because the company is looking to create a culture of ownership in the company, to give each individual worker a stake in the corporate enterprise, so if the company succeeds, the employee succeeds as well. And frankly that kind of democratization of corporate control and corporate wealth is something that Congress has favored. If you talk to a lot of companies, they like the feature of the plan. Many companies have done very well by investing a portion in company stock. And frankly if you had gone to some of the employees and said, “do you want it capped out at 10% or 20%?” They would say, “absolutely not.” We have a company that on a voluntary basis, as a matter of design, put in a 25% cap. They took it away in response to active employee lobbying because employees felt we can’t share in the success of the company without at least a choice to put more in stock. We have to look at context. This is not the only plan folks have. Most of the big companies in matching company stock have a traditional pension funded by the employer and guaranteed by the government. So on top of that, they have a 401(k)…

MARGARET WARNER: Where the company stock is not allowed, as Mr. Machiz just explained.

JAMES DELAPLANE: Right. And it’s insured by the government.

MARGARET WARNER: Mr. Machiz, isn’t there a financial advantage to the companies in matching the stock?

MARC MACHIZ: There’s a financial advantage, because it means that they don’t have to match with cash. It’s easier on their cash flow. I want to respond to something Mr. Delaplane said. He said there are advantages to the employee stock owners plans, the so-called ESPOS, and there are tremendous tax advantages to 401(k) plans. The issue is not whether a given employee wants to gamble on the future of his company, the issue is whether you and I, as taxpayers, should be paying with tax dollars with these tax advantages, tax subsidies for a retirement system that amounts to casino gambling on the fate of your particular employer. Of course employers want to do this, of course employers want to use their retirement plans to motivate their employees. I understand that completely. The question is why is the federal government, why are all of us as taxpayers paying for that subsidy? As I said before, I don’t think it’s something we ought to tolerate.

MARGARET WARNER: So you would you put a cap on it?

MARC MACHIZ: Absolutely, I would put a cap on it. For those companies that in fact have generous defined pension plans, perhaps the cap could be more generous. We could leave a little more room for… For the companies that don’t, the cap ought to be severe, perhaps more severe than what is being contemplated by the legislation presently before Congress.

JAMES DELAPLANE: My point is that it’s not that employers want to match company stock, employees like the choice of investing in company stock. The entire 401(k) system is based on the premise of individual choice, individual flexibility, and therefore, individual responsibility.

MARGARET WARNER: What about Mr. Machiz’ point that it isn’t totally individual, all of us as taxpayers are subsidizing these?

JAMES DELAPLANE: The 401(k) plan it simply one design where Congress has judged that providing stock to rank and file workers is a good thing. We have employee stock purchase plans that, by law, have to cover the whole work force and they’re tax advantage. Congress believes that rank-and- file stock holding is a positive thing. I think there are protections in place with defined benefit systems with the Social Security program that as long as participants are well informed, well educated, and well-advised to make the choices they have to make, that’s where Congress should focus their attention.

MARGARET WARNER: Mr. Machiz, it’s true, is it not, that in Enron and some of the other cases that it’s not the company match — a lot of the employees say, “I want to buy more of the stock. This stock is so hot.” Should the government be in the position of protecting workers from bad investment decisions?

MARC MACHIZ: I think the answer is outside of the company plans, probably not but where we’re in effect subsidizing it, yes. What we’re all paying for is a secure and safe retirement system. We are not paying for an opportunity for people to gamble. It is our job to protect people from themselves. And what’s more, the companies are encouraging people, as Enron did, to invest in the company stock. Sometimes that encouragement is happening at a time when the business has no business encouraging anybody, employees or other investors, to be in that stock. But we can prevent that by requiring diversification.

MARGARET WARNER: What about that point, Mr. Delaplane, in the Enron case in August, even as Ken Lay was unloading his own stock, he was sending e-mails to employees saying, “I feel really great about the company and we should result in much higher stock prices, the steps I’m taking.” Where is the responsibility there?

JAMES DELAPLANE: My sense is the company has a responsibility with respect to what they tell their workers how to invest that plan. And I think most corporate executives will stay away from making specific recommendations about what individual employees should buy in their 401(k) plan. I don’t think Mr. Lay was that specific, but most executives stay away with that because that’s specific advice what to do with your account. Most employers don’t take that step, they educate as a general rule about asset allocation and principles of risk and diversification, but they wouldn’t make a specific recommendation.

MARGARET WARNER: Before we close, also let me ask about the other feature the employees complained about, as we heard, so-called stock lock. Are these company restrictions? In Enron’s case, they couldn’t trade or diversify with the company’s stock until after the age of 50. Is that common? Why do companies do that?

JAMES DELAPLANE: When a company matches with stock, it is fairly typical to have a holding period. It’s not always age 50. It could be younger age. The trend line has been for shorter holding periods in the market. They want that long-term stake, they want that long-term alignment between the employee and the rest of the company so there is a long-term connection to the corporate enterprise.

MARC MACHIZ: Quickly, I think people are not being educated about the diversification in a meaningful way. Usually in these plans, the only way to be undiversified is to invest in the employers’ stock. Any other option that’s presented to you is a diversified option.

MARGARET WARNER: But would you do say the ability of companies to put the stock locks should be taken away?

MARC MACHIZ: Absolutely, the locks are a problem. But I don’t think if there had not been a lock at Enron, that that would have solved the problem. Don’t be fooled that if we just eliminate the locks the problem will go away. As you pointed out earlier, a lot of the employees had the bulk of their stock in Enron as a result of their own choice.

MARGARET WARNER: Mr. Delaplane, bottom line, what’s wrong — I understand why you don’t think it is a great idea, but is there any harm done if some of this legislation does pass?

JAMES DELAPLANE: Absolutely. The risk is particularly with the caps, that companies matching with company stock will not match anymore. They may not have the resources to match at an equivalent level in cash; they may reduce their match. If they can’t achieve this corporate ownership purpose to the match, they may not match. And I bet that most employees would prefer a match in company stock to no match. That’s why we’d like to see Congress focus on making sure participants had the information they need, and education they need, to make sound judgments.

MARGARET WARNER: A quick rejoinder on that point; the companies might just stop matching.

MARC MACHIZ: We might have the same conversation in 1974, when Congress first legislated by requiring employers to set up safe employee benefit plans. The argument was fewer employers are going to want to maintain plans. It turns out not to have been the case. If we need to encourage employers in other ways, we should do it. What we need is a safe, secure system. That’s what we’re paying for with our tax dollars. That’s what we should get.

MARGARET WARNER: All right. Gentlemen, we have to leave it there. Thank you both very much.