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JANICE FARMER, Former Enron Employee: I trusted the management of Enron with my life savings. Senators, I won’t mince words here. They betrayed that trust.
PAUL SOLMAN: They’ve become a national cause celebre: Enron employees, robbed of retirement because they were exhorted by their bosses to fill their private, self-managed pension plans, their 401(k)s, with now- worthless Enron stock. Worrisomely, Enron is not alone.
Last week we interviewed high and low, and heard the same lament from blue-collar employees of Rochester Telephone, which became Frontier, then Global Crossing, then bankrupt.
ZIGMENT OZAROWSKY, Former Global Crossing Employee: I worked 38 years for the company, and I lost 3,195 shares, which actually amounts to about $200,000.
TIM DAILOR, Global Crossing Employee: I lost 8,300 and some odd shares, about $400,000.
ANTHONY ALFANO, Global Crossing Employee: I’ve contributed about probably $150,000 of my own money. With company match it was probably about $200,000.
PAUL SOLMAN: If the workers’ tales tug at the heart, however, they also puzzle the mind — because no matter how good their company seemed, no matter how much of a sales pitch they were given, why would any workers put the bulk of their retirement in just one stock, much less the one they already relied on for a paycheck?
Had they never heard of diversifying, the one financial mantra chanted by every guru out there from Suze Orman to Jonathan Pond, to Jane Bryant Quinn to Andrew Tobias?
ANDREW TOBIAS, Financial Advice Author: You want to diversify and, you know, you don’t want to invest money in the stock market that you can’t afford to lose.
PAUL SOLMAN: Now, diversifying seems so obvious that Tobias, speaking to a noontime crowd at a New York Barnes and Noble, assumed his listeners needed no convincing. After all, he was promoting the latest version of his Only Investment Guide You’ll Ever Need, which has been touting diversification to reduce risk since its first edition in 1978, though the insight’s a lot older than that.
ANDREW TOBIAS: Did Aesop write, and what language did he write in, his fables? I don’t even know, but– I don’t even know if they were his baskets– but he had this basket, one basket, and he had all these eggs. And then he tripped, you know, and all the eggs broke. Don’t put all your eggs in one basket.
PAUL SOLMAN: Especially don’t put all your nest eggs in one basket; that is, your pension. It’s a truism in economics, but for a number of reasons, it’s hard to swallow.
PAUL SOLMAN: How many people think it’s a bad idea in general to invest a substantial amount of your 401(k) in the company you work for? (hands go up) How many people think it’s not a bad idea? (hands go up) One, two, three, four, five, six– so about three to one, something like that.
ANDREW TOBIAS: Clearly you shouldn’t put all your 401(k) money in your own company stock. If any, you put any in 10 percent or 20 percent.
PAUL SOLMAN: This is the most common investment advice you could get, right? You’re already invested in your company.
ANDREW TOBIAS: Thanks a lot.
PAUL SOLMAN: No, but… ( laughter ) that’s what you tried to…
ANDREW TOBIAS: I charge good money for this. This book is not free. The most common advice…
PAUL SOLMAN: It’s the sagest, the most basic advice you can give.
ANDREW TOBIAS: And everybody has been giving it for years.
PAUL SOLMAN: And you have been giving it for years and we’ve been reading it for years. So then why would it be that people would do the silliest, most undiversified thing you could do? What’s your explanation?
MAN IN AUDIENCE: Talk to the thousands of clerks and secretaries who work at Microsoft or General Electric and have become millionaires because they weren’t restricted.
PAUL SOLMAN: But it’s a stupid decision, isn’t it?
WOMAN IN AUDIENCE: No, no, no.
PAUL SOLMAN: I mean, it’s a stupid decision on average, isn’t it?
YOUNGER MAN IN AUDIENCE: If Enron had gone from $100 to $3,000 instead of from $100 to zero, then all of those employees would be investment geniuses, I think, instead of litigants and creditors at this point. So I think it’s relative to how well their company does and how honest the company is.
PAUL SOLMAN: In fact, Enron did go way up for a while, until it came crashing back down. And some stocks haven’t crashed, and may never. But how’s a worker to know? Investing mainly in one company is betting the ranch, whether it’s on some Internet high flyer or the company you just happen to work for.
Yet many workers at big companies have their 401(k)s stuffed with company stock. Sometimes that’s because the companies match worker contributions in stock, then restrict its sale, but many workers buy on their own. So at General Electric, for instance, workers can choose any investments they want, yet 75 percent of all 401(k) assets is invested in GE; at Coca-Cola, 77 percent is in Coke, with only a tiny bit contributed by the company. At Procter and Gamble, workers choose to hold 86 percent of their 401(k)s in Procter and Gamble stock.
At the moment, all these companies seem to be thriving, and their stock has paid off handsomely for past employees. But in the last year alone, at Rite Aid and Lucent, for instance, which had been going great guns, looked like sure things, workers have lost most or all of their retirement savings because they were saving in company stock, which, to Andrew Tobias, is at the very least naive, even if, for some strange reason, you didn’t want to diversify.
ANDREW TOBIAS: Let’s say you decided, "I don’t believe in diversification. I want to buy just one stock and put everything I have for the future into one stock"– which when you say it that way, does sound kind of risky, reckless, stupid– but let’s say you decide that. What a coincidence if the one best stock to put it in happens to be the one you… the company you work for?
PAUL SOLMAN: So then why do so many of us behave irrationally? Well, for one thing, because we’re finally allowed to. Up till the 1960s, most large American companies had defined benefit pension plans, promising fixed payments after retirement from money invested safely by the company.
SINGING: Get yourself a lark plenty of flash…
PAUL SOLMAN: Sometimes companies played fast and loose with the money, like the Studebaker automobile company, which went bankrupt in 1968 after having spent every last dime of its pension fund. So the government eventually guaranteed defined benefit pensions, today up to $41,000 a year.
But the government also began encouraging private pensions, allowing employees to invest their own money, pretax, in Individual Retirement Accounts known as IRA’s, and accounts to which companies could contribute, 401(k)s. And this had an unfortunate result, says Karen Friedman of the Pension Rights Center. Companies began offering 401(k)s– cheaper to fund and administer– instead of the costlier, defined benefit plans.
KAREN FRIEDMAN, Pension Rights Center: Over the last decade or two, we’ve seen a wholesale shift from employer-paid plans where the employer took the risk, where employees were promised fixed benefits for life; to uninsured, risky, do-it-yourself savings plans. It’s basically a shift from, you know, good, solid insured benefits to less secure benefits for the American workforce.
PAUL SOLMAN: The new plans aren’t insured, and they’re often not diversified, in part because back in 1974, the government made another change: Giving tax breaks to companies to encourage worker ownership. Ed Ferrigno of the Profit Sharing Council of America explains the reason.
ED FERRIGNO, Profit Sharing 401(k) Council of America: The common goal of any corporation is to increase shareholder wealth. And making employees part of that process by making them shareholders is a win/win situation for the management, for the employees and for the shareholders in general.
PAUL SOLMAN: But, says Karen Friedman, the government forced diversification in the old defined benefit plans.
KAREN FRIEDMAN: For 28 years, the private pension law in this country has said of employer pension plans, when the employer takes the risk, that they can only have 10 percent of employer stock in those plans.
Why? Because they know that that’s prudent investment policy. But for some reason, when employees assume the risk in these 401(k) plans, uninsured 401(k) plans, suddenly we’re saying, "Oh, prudence is out the door. Let employees do whatever they want."
PAUL SOLMAN: So we’re back to the basic question: Why are so many workers, when they manage their own pensions, imprudent? It can’t be just tax breaks, because the workers didn’t only hold company stock they were given; they bought far more.
JOANNE BAUMANN, Global Crossing Employee: It’s because it’s where you work. It’s that loyalty, and it’s the part of your heart that you just believed in them.
ZIGMENT OZAROWSKY: We built the company up. We built it up until Global Crossing got a hold of it and tore it down.
PAUL SOLMAN: You’re essentially betting on yourself.
ZIGMENT OZAROWSKY: Exactly. We had confidence in ourselves. That’s what we had.
JOHN PUSLOSKIE, SR., Global Crossing Employee: Most of the guys who work here, sometimes you fall in love with something. And that’s what happened to us. All of us fell in love with this company and we didn’t know how to divorce ourselves from it.
PAUL SOLMAN: Okay, so loyalty is one factor, especially if your bosses are telling you company stock is going to make you rich. But what happened to skepticism, caution, the basic lessons of economics — drowned by human psychology, says Harvard’s Jeffrey Laibson, which is why he calls himself a behavioral economist.
JEFFREY LAIBSON, Behavioral Economist: Behavioral economics is an effort to bring psychological ideas into the economic debate. Sometimes the psychological forces lead us to make mistakes, say when we perhaps use our gut and the familiarity we have with a company to lead us to invest in it.
PAUL SOLMAN: Workers think the stock market is undervaluing their firm and they load up on the stock, say behavioral economists, because of the familiarity effect, and because in a bull market they think they can’t lose.
TIM DAILOR, Global Crossing Employee: I know what I put into this job. I know what the people that I work with put into the job. We’re going places with this company. This is going to hang on.
OLDER EMPLOYEE: I did have a financial advisor. I sat down on my kitchen table, and he told me, he says, "you’re too heavy in the global crossing." He said, "you should diversify yourself."
PAUL SOLMAN: Well, why didn’t you?
OLDER EMPLOYEE: Because I still had faith in our company, and our people were telling us, "we’re going to be the upcoming, we’re going to be the dominant player in the world as far as communications and fiber network."
STEVE WHITE, Former Global Crossing Employee: I know about telecommunications. I know about my company. I know that it bought 40 companies across the country and created this… this network.
PAUL SOLMAN: Oh, you just caught up in the hype?
STEVE WHITE: The hype. They hype, and it’s going to go higher.
JEFFREY LAIBSON: So the combination of workers feeling a bit too comfortable because of the familiarity effect; the combination of the bull market leading them to extrapolate recent past returns; the combination of firms encouraging worker loyalty by getting firms involved; the combination of firms providing a lot of the 401(k) match into the 401(k) account; and workers’ passivity in terms of changing these things, the status quo bias, the tendency to stick with whatever you have, all leads to these outcomes.
PAUL SOLMAN: It is precisely these outcomes that many in Congress are hoping to change, with bills to put limits on company stock, mandate investment education and allow workers to sell their company stock with fewer restrictions.
Still, at Enron, workers almost never sold, even when allowed to. And as to education, my own efforts, at least, were not encouraging.
PAUL SOLMAN: If you went to work for Proctor and Gamble tomorrow, would you put your pension savings in proctor and gamble stock?
PAUL SOLMAN: Has anybody been converted by these arguments?
STEVE WHITE: I see what you’re saying about diversification and I agree with it. I believe in it. It’s… but it’s kind of hard, like we’re saying, you can get caught up in it.
PAUL SOLMAN: And in the end, getting caught up can, as we’re now seeing, cost you your retirement.