Sponsors Fight 401(k) Plan Limits
WASHINGTON--Small businesses, big corporations and trade associations are mobilizing for an all-out lobbying effort to head off proposed restrictions on how they administer employee retirement programs in the post Enron era.
Employers fear that Congress, in its zeal to respond to Enron’s implosion, will limit their ability to use tax-advantaged 401(k) plans to promote--and in some cases compel--employee ownership of company stock.
“This is gigantic,” said James Delaplane, vice president for retirement policy at the American Benefits Council in Washington. “This is very, very significant for the benefit community, for the employer community, for the plan sponsor community, because a number of the things on the table are very fundamental changes.”
Critics say changes are needed to avert future disasters like the collapse of Enron, which wiped out the retirement savings of many of the company’s investors. Millions of Americans have a portion of their 401(k) accounts tied up in company stock, and their ability to switch to other investments often is restricted. They stand to lose not only their jobs if the firm fails, but their nest eggs too.
Defenders of the system say companies that compel employee stock ownership do so because it makes workers more loyal, productive and profit-conscious. But there are other benefits as well: Contributing company stock instead of cash to retirement accounts boosts cash flow, reduces taxes and provides companies some shelter from stock price swings and takeover attempts.
“Employers are using their contributions to employees’ 401(k)s as a strategy to manipulate the value of their stock,” said University of Notre Dame economist Teresa Ghilarducci. “That’s become a key tactic in keeping their share prices stable. They’re using the nation’s pension system for purposes it was never intended.”
The clamor on Capitol Hill reflects a broader debate over a shift in the ground rules governing worker retirement in America. Traditional “defined benefit” pension plans that obligate employers to provide a guaranteed level of benefits are gradually being supplanted by “defined contribution” plans that transfer decision-making to employees.
Companies have flocked to 401(k)s because they tend to cost less than traditional pension plans and relieve employers of responsibility for future shortfalls.
“You’ve got $2 trillion in these plans,” said Rep. George Miller (D-Martinez). “You’ve got people within the financial and accounting institutions who are incredibly conflicted. You’ve got the whole idea that Americans are going to have to provide more and more for their own retirement. This is high stakes.”
Retirement plan sponsors, which include companies, unions and pension funds that have 401(k)s for their members or employees, and the associations that represent them are dispatching lobbyists to the House and Senate to attempt to limit the scope of reform measures.
The big players have banded together in an ad hoc coalition called the Committee on Employee Retirement Benefits. More than 60 industry and professional organizations, from the National Assn. of Manufacturers to the American Society of Pension Actuaries, are urging lawmakers to proceed with caution before tinkering with the retirement accounts of 42 million Americans.
But it will be difficult to maintain the status quo. President Bush is among those advocating changes in response to Enron’s collapse, which obliterated more than $1 billion in employee retirement savings.
About 60% of Enron’s 401(k) plan assets consisted of company stock, which lost virtually all of its value as the company’s financial problems and accounting irregularities became known.
Most financial planners say employees should invest no more than 10% of their retirement savings in their own companies.
At least a dozen pension reform measures are under consideration in Congress. But the one that scares plan sponsors the most is a bill sponsored by Sens. Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.) that would allow employees to invest no more than 20% of their 401(k) funds in shares issued by their employers.
Plan sponsors argue that the government has no business telling company employees how they should invest their money. But Boxer and other advocates of a cap on company stock holdings say there is a legitimate public interest at stake: The tax deduction granted to employers for their retirement plan contributions reduces federal revenue by about $90 billion a year.
It’s the government’s biggest tax subsidy, more costly than the deductions allowed for mortgage interest or employee health insurance.
“Taxpayers are subsidizing these plans by tens of billions of dollars by giving tax breaks to employers,” Boxer said. “Because the federal government is giving all these wonderful incentives, I think it’s very, very appropriate to have rules that protect these plans.”
Plan sponsors warn that caps would require constant monitoring of account balances and mandatory sales of company stock if the price appreciated substantially. They say it would punish employees for having picked a winner and force them to subordinate their investment objectives to those of the government.
“We’re not arguing that no change is necessary, but the issue of caps just goes the wrong way,” said Mark Ugoretz, president of the ERISA Industry Committee, which represents big corporate employers. “It forces the employee to sell or prevents the employee from buying the stock when it’s increasing in value.”
Another reform proposal disliked by many plan sponsors would affect employers that contribute
company stock instead of cash to workers’ 401(k) accounts. In some cases, they require employees to hold the shares for years, making it difficult to diversify--or bail out if problems arise.
Of the estimated $1 billion in retirement savings lost by Enron employees, about $100 million came from company stock they were prohibited from selling until age 50.
President Bush’s reform plan would allow participants to sell their company-contributed stock after three years. Miller is sponsoring legislation that would reduce the waiting period to a year. The Boxer-Corzine bill would let workers diversify after 90 days.
Plan sponsors and their advocates are concerned about other proposed reforms, such as the use of outside investment advisors to counsel employees, restrictions on “blackout” periods--when employees are barred from selling stock--and expanded financial liability for plan administrators.
They are asking Congress to put off consideration of Enron-inspired reforms until more is known about the causes of the company’s failure and whether any of the 401(k) changes under consideration would have prevented the loss of employee retirement funds.
“There’s a lot of stuff being put on the table that has nothing to do with company stock,” said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. “People who have other agendas are starting to take advantage of this.”
