PRESERVING PENSIONS

April 2002
		Mark Machiz, former Associated Solicitor at the Labor Department during the Clinton administration, and James Delaplane, a vice president of the American Benefits Council, answer your questions on improving retirement security.

Forum Introduction Why do current government regulations limit tax-deductible retirement investments to $3,000? Should our retirement portfolio be diversified, even if it has only Blue Chip stock? How do corporations use employee 401(k) plans to improve their bottom line? Do the Enron and Global Crossing bankruptcies illustrate a problem endemic in corporations and their misuse of retirement funds? How did Enron employees lose their 401(k) savings and what was the "blackout" period in which they could not sell any of their shares? Is that legal?       Online Special: Enron: After the Collapse Feb. 19, 2002: Enron's collapse and its affect on pensions in the state of California. Feb. 11, 2002: The government replaces Enron's pension committee Feb. 1, 2002: Experts discuss the president's pension plan reforms. Jan. 28, 2002: The repercussions of Enron's collapse in its hometown of Houston, Texas. Jan. 18, 2002: Issues and answers about retirement accounts following the collapse of Enron. Dec. 12, 2001: How Enron's bankruptcy is affecting its former employees. Browse the NewsHour's coverage of Business

Harry Scheerer from Houston, TX asks: Why should our entire retirement system be overhauled simply because one company, Enron, messed up? Unless Enron and Global Crossing bankruptcies actually illustrate a problem endemic in corporations and their use of retirement funds? What are some federal limitations on a corporation's use of retirement funds? Can they buy back company stock using pension plan funds in an attempt to boost share price? Can they borrow against retirement funds to provide funds for mergers? Can they use the funds directly to fund takeovers, buy corporate issued bonds, pay down company debt, etc? Mark Machiz responds: It's not just Enron. I don't want to provide a long list of company names here, because even the worst will insist that they're not as bad as Enron. But the business pages are filled with companies (currently mostly in the technology area--but recently including companies as diverse as Waste Management and Cendant) that have suffered severe setbacks in their stock prices -- sometimes due to the exposure of fraud, and sometimes simply business reversals. Many more companies, including name brands outfits as well or better known than Enron, are ripe for disaster because their employees are even more heavily invested in company stock than were the employees at Enron. I can't fully address the subsidiary questions without delivering a full class on the law, but suffice it to say that the ability to purchase employer stock with retirement plan money is the largest loophole in the law against self-dealing with retirement money. Purchasing employer stock from the company or on the market is generally permitted, though certain circumstances such as buying stock at takeover fight inflated prices for the purpose of defeating a takeover can violate the law. Once an employer sells shares to its retirement plan, it is free to the use the proceeds of the purchase as it sees fit. James Delaplane responds: We at the American Benefits Council share the view that the isolated problems at Enron should not lead Congress to radically restructure our nation's very successful retirement savings and employee ownership programs. Forty-two million Americans participate in 401(k) plans and have accumulated $1.7 trillion in these plans. Fourteen million more participate in other varieties of defined contributions plans, such as employee stock ownership plans (ESOPs) and profit-sharing plans, where they have built an additional $800 million in retirement savings. Moreover, the problems at Enron were not primarily 401(k) problems but more fundamental problems of corporate accounting and disclosure. Congress should not rewrite the rules for 401(k) plans and risk very harmful unintended consequences simply because one firm did not provide its shareholders with accurate information about the state of the company. Companies cannot use 401(k) funds for any of the purpose outlined in your questions. The amounts in the 401(k) plans are in employee accounts and those amounts, once vested, are the sole property of the employee. They are not the property of the employee and so cannot be used the ways you outline. Assets in defined benefit pension plans are managed by the employer but must be managed more prudently and solely in workers' interests. Thus, while defined benefit pension plans may own employer stock or employer bonds, they can own only as much of these assets as is prudent. In terms of other uses of pension assets, the law imposes extremely large tax penalties on any use of pension surpluses for on-pension purposes. These tax penalties have largely halted the use of pension assets for corporate takeover purposes. A different set of rules applies to employee stock ownership plans (ESOPs), which can serve corporate financing purposes if rigorous regulatory requirements are satisfied.