Betting It All on Company Stock Is Risky Business

The dangers of workers owning too much of their company’s stock in 401(k) plans have been made vividly clear by the Enron Corp. debacle. Despite the perils, millions of American workers have no choice but to bet their retirement savings, as well as their jobs, on the fortunes of their employers.

Gary Kemper, an Enron maintenance foreman from Banks, Ore., received shares of Enron stock as the company’s contribution to his 401(k). Since December, he’s seen the value of those shares dwindle by nearly $200,000--a loss that has quashed his hopes of retiring in four years at age 62.

Kemper said he’s more fortunate than some of his co-workers, who he said are facing retirement losses of as much as $800,000 each as the company’s stock fell from $90.56 in August 2000 to 36 cents Thursday in the wake of a financial scandal and a failed takeover.

Enron employees had a total 62% of 401(k) assets invested in company stock at the beginning of the year, even though participants had 18 other investment choices, according to Securities and Exchange Commission filings.

Enron employees may have lost more than $1 billion of their retirement funds, workers’ attorneys said. These 401(k) participants are unlikely to recover any of their money should Enron file for bankruptcy, because shareholders are typically at the end of a long line of creditors in such proceedings.

“We just didn’t see the cliff coming. No one did,” said Kemper, who has filed one of several lawsuits against the company’s officers over the 401(k) losses. His suit accuses Enron executives of failing their fiduciary duty to workers by using company stock as a match, by encouraging workers to put their own money into company stock and by not warning employees about the company’s huge financial problems. Enron has declined to comment on the litigation.

The hazards of owning too much company stock in a retirement plan have long concerned financial planners and consumer advocates. But the nation’s biggest employers have repelled lawmakers’ previous attempts to limit such investments.

Companies say turning employees into shareholders promotes productivity and loyalty. It also keeps a chunk of company stock in presumably friendly hands--a deterrent to hostile takeovers.

“It gives employees a stake in the corporate enterprise,” said James Delaplane, head of retirement policy for the American Benefits Council, an employer trade group. “When the company does well they share directly in that growth.”

About 2,000 U.S. companies, covering 6 million of the nation’s 40 million 401(k) participants, offer their own stock as an investment option in their employees’ plans, said David Wray, president of the Profit Sharing/401(k) Council of America, a nonprofit trade group.

Some of those corporations--including many large employers such as Coca-Cola Co., Lucent Technologies Inc., Procter & Gamble Co. and Enron--essentially force 401(k) participants to invest in company shares by issuing them as matching contributions.

In a 401(k) plan, workers save for retirement by contributing part of their paychecks to a tax-deferred account, and those contributions are often matched by the employer.

Most companies make matching contributions to 401(k)s in cash, which the employee can put into one of several investment choices, such as stock, bond and money market mutual funds.

But companies that match in stock usually restrict their employees from selling those shares. Generally, the workers can’t sell until they near retirement age, making them captive investors, benefits experts say.

Such companies are relatively few, but they tend to be large, according to the Employee Benefit Research Institute and the Investment Company Institute. The institutes found that less than 1% of plans restrict their employees from selling company matching shares, but those plans cover about 2.8 million participants and include 11% of all 401(k) plan assets.

Such restrictions limit employees’ ability to properly diversify their investments to limit risk--in essence forcing them to put more of their retirement nest egg in a single basket, consumer advocates say.

“The very first and most important rule in investing is diversification, and employee stock [in 401(k) plans] is where we run afoul of that,” said David Certner, director of economic issues for AARP, formerly the American Assn. of Retired Persons. “When you can’t invest what could be one-third of your assets [because of restricted company stock matches], that limits the potential diversification you can do.”

In contrast to traditional pension plans, which promise a set paycheck to retirees, employees bear the full responsibility if their 401(k) investments, including their company stock, lose money. As stock prices have fallen, millions of American workers are discovering how risky a bet on one company can be.

“People are losing both their jobs and their retirement security,” Certner said. “It’s a disaster in the making.”

Workers compound the problem by investing their own money in company stock offered through the plans. These shares can always be sold, but many employees hang on to them either out of loyalty to the company, ignorance about the need for diversification, or both, benefits experts say. Most financial planners say no more than 10% to 15% of a portfolio should be invested in shares of one company--let alone the same company that controls the worker’s paycheck and other benefits.

Yet recent surveys show 19% of the nation’s 401(k) assets are invested in company stock, a percentage that rises to 30% when smaller 401(k) plans that don’t offer company stock are factored out. And at some big companies, the percentage of company stock in retirement plans is far higher.

In the past, lawmakers’ efforts to cap the amount of company stock that can be held in a 401(k) plan have been beaten back by major employers who prefer to issue shares--which cost them virtually nothing--instead of matching contributions with cash, which must be reported as an expense. In fact, some companies say they wouldn’t match their employees’ contributions at all if they couldn’t do so in company stock. Employers that have 401(k) plans are not required to offer a match.

In 1996, Sen. Barbara Boxer (D-Calif.) sponsored a bill that would have limited the proportion of company stock in 401(k)s to 10% of total plan assets. Such limits already apply to traditional corporate pensions, which unlike 401(k)s are typically managed by investment experts.

The bill was in response to previous 401(k) plan disasters, such as the ones that wiped out the bulk of workers’ savings at Carter Hawley Hale Stores of Los Angeles and Color Tile Inc., a nationwide retailer of floor and counter coverings.

After lobbying from employers, including consumer products giant Procter & Gamble and pharmaceutical company Merck & Co., a much-modified version of Boxer’s plan became part of the 1997 Taxpayer Relief Act, but the actual limit applies to very few of the nation’s 400,000 401(k) plans.

Employers are prohibited from requiring workers to invest more than 10% of their own 401(k) contributions in company stock. But employees who are given a variety of investment choices may opt to put as much in company stock as they want.

Still, Boxer said Enron might have violated the law when it blocked employees from selling company shares during a four-week period in October and November, just before revelations about the extent of Enron’s problems were made public.

“This lock-down had the same effect as forcing employees to invest in the company’s assets,” Boxer said.

Enron spokesman Vance Meyer said the company was not trying to force employees to stay invested but was instead executing a long-planned switch from one 401(k) plan provider to another, which required freezing employees’ accounts.

So far, Boxer said she has no plans to attempt a more wide-ranging cap on company shares in 401(k) plans. Congressional insiders say many lawmakers are reluctant to pass rules that could prevent employees from investing heavily in their own companies, if they wish to do so.

Many workers in the late 1990s benefited mightily from ignoring diversification rules and loading up company stock. Enron’s stock, for example, more than quadrupled in the five years before its officers disclosed the company’s earnings had been exaggerated.

Lucent, another highflier with heavy employee investment, rose nearly eightfold after its 1995 spinoff from AT&T; before crashing in last year’s telecom wipeout. Lucent’s management also has been sued by some of its 401(k) investors.

Enron foreman Kemper said his own “conservative nature” prevented him from loading up on Enron shares with his own 401(k) contributions. But neither did he sell the company shares he received as a match over the years when he turned 50 and was allowed to do so by Enron.

“I don’t want to sound like a hypocrite--I was enjoying it while [the stock] was going up,” Kemper said.