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

Bill Durkin from Houston, TX asks: 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? Can they do anything to retrieve that money? How do the investment goals of corporate (human resources) pension planners differ from the investment goals of individual investors? Why would there be so much variability from plan to plan among corporations? Mark Machiz responds: Enron employees lost their savings mainly by investing in employer stock inside their 401(k) plan, and because they received such employer stock as matching contributions from the employer (which could not be sold until age 60). Many employees purchased stock within the plan while the corporation was engaged in what is now a well publicized fraud calculated to artificially inflate the stock price. The blackout period aggravated the situation. While administrative blackouts with notice to the employees are not necessarily illegal (and are quite common when plans are merged or record keepers changed), the blackout here came in the midst of a uniquely troubled time for the company. Litigation challenging the blackout argues that the blackout was inappropriate when plan and company officials knew that more bad news about the company would be emerging during the blackout, and this information was not released before the blackout went into effect. Either the information should have been released, or the blackout delayed, or both. The biggest obstacle to retrieving the money is that far more was lost than anyone has the resources to pay. There will likely be some recovery that is a fraction of the loss, however you measure that loss. James Delaplane responds: The losses in the 401(k) accounts of Enron employees resulted from the very substantial decline in the price of Enron stock. Many employees had their 401(k) money invested heavily in Enron stock so when the price of this stock fell, the value of their accounts fell. The so-called "blackout" period occurred when Enron changed 401(k) administrators. It is perfectly normal for there to be some period in which employees cannot make investment changes inside their accounts -- usually several weeks -- when a company changes 401(k) administrators. Employers typically change 401(k) administrators to improve 401(k) services for employees by adding better or more cost-effective investment options, or by improving the customer service offered to employees. Thus it would be extremely counterproductive to prohibit this practice. While the blackout period at Enron was a normal consequence of changing 401(k) administrators and was fairly typical in length, it fell at a particularly bad time in terms of the company's financial health of the company and the price of Enron stock. As long as a company follows its legal obligations to act prudently and in employees' interests when it institutes a blackout period, such periods are perfectly legal. Enron employees are currently suing to recover the losses suffered in their 401(k) accounts. Whether they will recover that money will depend on whether Enron officials failed to act prudently and in employees' interests in connection with the blackout period and the operation of the 401(k) plan generally. The individuals at a company that manage that company's retirement plans must have employees' investment goals in mind rather than their own. Our nation's pension laws require such officials to act solely in the interests of the participants in the retirement plan. If they fail to do so, for example by letting their personal investment goals guide their actions, they are subject to a range of severe penalties including personal liability. Moreover, in 401(k) plans, the investment decisions are made by individual employees rather than the corporate officials who manage the 401(k) plan. This means that the personal investment goals of the corporate officials are not particularly relevant to how employee investment decisions get made. In terms of variability, the percentage of 401(k) assets in company stock will depend upon a number of factors, such as whether the employer contributions to the plan are made in the form of company stock or cash, whether employees have the option to invest their own money in employer stock and to what extent they do so, the particular culture of the company and whether that culture encourages stock ownership, and the price of the company stock at the time the share of 401(k) assets in company stock is determined.