Corporate Pension Games
Every day brings new revelations of corporate malfeasance at Enron. As congressional and Justice Department investigations proceed, new scandals will emerge and reforms will be debated. But one of the worst abuses is already clear: the loss of an estimated $1 billion in Enron employee pension benefits.
President Bush has asked the Treasury Department to study reforms of the voluntary tax-free pension savings plans known as 401(k)s, but it doesn’t take a finance genius to see that immediate action is needed to protect employees’ retirements. The issue is all the more crucial because fewer and fewer employers offer traditional pensions, which provide set monthly payments after retirement.
Enron is hardly a unique case when it comes to pension benefits. At Lucent Technologies, for example, employees who saw the value of their pension savings virtually erased say they too were the victims of over-optimistic earnings projections and unclear accounting practices.
There was another, separate problem at Enron, an oddly timed “lockdown” during a changeover of plan administrators. The net effect was to prevent employees from selling company-matched stock right after corporate chieftains dumped theirs. Such behavior is not what Congress had in mind when it first authorized 401(k) plans in 1974. They were supposed to encourage workers to save for the future, not destroy their assets.
It would be easy to say that this is just tough luck for investors who put too much of their tax-deferred pension funds into company stock. Bush’s top economic advisor, Lawrence B. Lindsey, has called the collapse of Enron a “triumph for capitalism”--ultimately only the fittest survive. But survival of capitalism itself depends on investors being confident that the system is not rigged. That includes employee-investors, whose 401(k) and similar funds now constitute Americans’ most popular retirement programs.
The federal government needs to develop for 401(k)s and similar plans the kind of regular scrutiny that mutual funds receive. Employees, who are usually on their own in choosing 401(k) options, need investment advice from independent advisors. They need investment education. If a company like Enron is cooking the books, however, even the savviest investor may be doomed, especially if forbidden to sell company stock.
This is why perhaps the most important proposed changes are those in a bill by Sens. Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.). The measure would cap employer stock contribution matches at 20% and limit to 90 days the period in which an employer may force investors to hold on to company stock. Currently, employers can force retention of company stock for decades.
Employers have no legal obligation to provide 401(k) plans. If reform goes too far, then employers may simply decline to match employee contributions, with stocks or anything else. Also, it is possible that the 20% provision is too stringent from employees’ perspective. But the need to encourage diversification is clear; the 90-days provision would allow employees to invest sooner in a variety of stocks.
Protecting employees and making it attractive for companies to provide matching benefits will require compromise. But as the Enron case shows, Congress must act.
