BY NOW, many people have heard of the vanishing 401(k) savings of Enron Corp. employees.
Heavily invested in company stock and barred from selling their shares as the price plummeted, many Enron workers saw their retirement savings nearly wiped out as the company headed for U.S. Bankruptcy Court last month.
The debacle prompted President Bush to order a review of pension rules.
"We are now seeing the chink in the 401(k) plan's armor. For the first time in 401(k) history, we are seeing the effect that placing all of this risk on the shoulders of plan participants is having," said John Hotz, deputy director of the Pension Rights Center in Washington.
Enron is an extreme case, of course, but workers at many large companies share an investment situation that left Enron workers vulnerable: Holding more employer stock in their 401(k)s than most financial advisers recommend for diversification.
Many financial advisers recommend that workers hold no more than 10 percent of their 401(k) assets in company stock, while others suggest no more than 20 percent.
At Enron, company stock made up about 58 percent of plan assets, according to a survey released last month by the Institute of Management & Administration, a New York newsletter publisher. Elsewhere, the level was even higher.
Using the latest information available, IOMA found that company stock accounted for nearly 95 percent of 401(k) assets at Procter & Gamble Co., about 92 percent at Sherwin-Williams Co., 90 percent at Abbot Laboratories, about 86 percent at Pfizer Inc. and about 81 percent at BB&T Corp., Anheuser-Busch Cos., Coca-Cola Co. and General Electric Co. (The Tribune Co., which owns The Sun, had 25 percent of its plan assets tied up in company stock.)
Workers tend to end up with a lot of company stock because they receive the shares as a match for their own contributions and many times, as with Enron, they are prevented from selling those matching shares until they are in their 50s.
Workers also buy company stock out of loyalty, a belief that the stock is less subject to downturns than other investments and because they like buying stock in what they know, experts said.
Companies like giving stock as a match because it's inexpensive and the shares end up in friendly hands, rather than in the clutch of a competitor plotting a hostile takeover or a demanding institutional investor, experts said.
Does the 401(k) need fixing?
"Change is definitely needed," said R. Theodore "Ted" Benna, president of the 401(k) Association in Pennsylvania.
"There is a potential for serious erosion of confidence among workers" if the stock market remains weak, more Enron-like 401(k) stories pop up and plan changes aren't made, Benna said.
If workers lose confidence in the 401(k), they may participate less, which can cause serious problems for the large number of employees currently not saving enough for retirement, he said.
Congress already is recommending 401(k) fixes.
Last month, a House bill was introduced that would not allow employees to put more than 10 percent of their contributions in company stock. Workers would also be able to sell company stock three years after buying it.
A bill offered in the Senate last month proposes that employees cannot have more than 20 percent of their account assets in any one stock, and workers would be able to sell an employer match of company stock after 90 days. Also, a company that uses its stock as a match would get a 50 percent, rather than 100 percent, tax deduction on its contributions.
Hotz, who supports the Senate bill, said the majority of workers aren't capable or interested in managing their 401(k) and need the protection the bill offers. If they want to own more company stock than the bill would allow, employees can always buy stock outside the plan, he said.
But some employer groups argue against rushing change until what happened at Enron and the pitfalls of 401(k)s are studied.
Some also oppose a limit on how much company stock can be owned in a plan, saying it could trigger the sale of stock if company shares go up but the rest of the investments in the 401(k) drop.
"You would be penalizing people because their company's stock investments did well," said James A. Klein, president of the American Benefits Council, a trade group in Washington for large employers.
Even some advocates of change worry about placing too many restrictions on employers. Benna, for instance, said limiting how much company stock an account can hold could backfire.
"Company contributions are voluntary. Once you start telling companies they can't make their own contribution in stock, I believe it will be detrimental to participants. Some [companies] will reduce or eliminate the match," Benna said. It's better to get a match in company stock than no match, he said.