Employer Stock Still Dominates 401(k) Mix

The Enron Corp. debacle apparently has failed to convince the average worker of the dangers of owning too much of their employer’s stock in a 401(k) retirement account.

Employees as a whole have not moved their money out of company shares in the two months since Enron’s bankruptcy wiped out about $1billion of its workers’ retirement money, said Hewitt Associates, which tracks daily changes in 401(k) plans used by 1.5million participants.

Fidelity Investments, the nation’s largest 401(k) plan provider with 7.9 million participants, said it has seen no indication that workers are buying less company stock with their 401(k) contributions or are shifting their existing investments away from company shares. Other plan providers, including the Vanguard Group and T. Rowe Price Group, reported similar findings.

“Most participants are looking at [Enron] as a pretty unique and isolated incident,” said Bill McNabb, managing director for Vanguard’s institutional investor group.

The percentage of company stock in plans that offered such shares peaked at 35% in 1999, then declined to about 30% by September, where it has remained ever since. Hewitt and other experts believe the overall stock market decline, rather than worker distaste for company shares, was responsible for much of the slide from 1999 to 2001.

The lack of movement since then underscores workers’ attachment to their companies’ shares, despite financial planners’ warnings that no more than 10% to 20% of a worker’s retirement portfolio should be tied up in their employer’s stock. Employees’ refusal to diversify is largely due to inertia and overconfidence about their companies’ prospects, investor and consumer advocates say.

“They think, ‘The company I work for is stable, it’s growing, why shouldn’t I put my faith in that?’” said T. Rowe Price spokesman Brian Lewbart. “That sort of logic makes some sense, but it also flies in the face of the overall diversification message.”

In a 401(k) plan, workers save for retirement by contributing part of their paychecks to a tax-deferred account, and those contributions often are matched by the employer. The amount of money the worker has in retirement depends on how well the investments in the 401(k) perform--in contrast to traditional pensions, which guarantee a set payment in retirement.

Many workers have turned their 401(k) funds into gambling casinos, making big bets on their company stock in hopes of striking it rich--not fully realizing that such bets can go wrong and leave them without enough money to retire on, said Karen Friedman, director of policy strategies for the Pension Rights Center, a consumer group in Washington.

Friedman said employees’ failure to diversify means that lawmakers may have to step in to limit company stock in 401(k)s. Such limitations already are placed on the managers of traditional corporate pension plans.

But companies and many employees insist that big retirement investments in company stock aren’t always irrational.

T. Rowe Price’s Lewbart, for example, said a significant amount of his own family’s net worth is invested in the shares of his wife’s company: Citigroup Inc.

Lewbart said he understands the need for diversification, but also cites the reasons many other employees use for investing in company stock in a 401(k): He and his wife have a high tolerance for risk, confidence in the company and a history of good returns from the stock.

High returns have helped prompt employees at General Electric Co. to invest 77% of the 401(k) assets in company stock, said company spokesman David Frail.

GE’s shares grew at a 33% annual pace from 1995 to mid-2001, a performance that boosted the value of employees’ 401(k) investments and encouraged them to contribute more, Frail said. Since then, the shares have lost about 28% of their value, compared with a 13% drop in the benchmark Standard & Poor’s 500.

Like many other companies, GE contends that its employees’ risk is lessened by the presence of a traditional pension plan. These plans have lost favor with many employers, but they still are offered by big firms that have company stock in their 401(k) plans.

Once the value of GE’s pension is taken into account, just 20% of the average worker’s retirement portfolio is invested in GE stock, Frail said.

Having a traditional pension generally means that investors can take a bigger gamble in their 401(k)s, since they won’t have to rely entirely on their own investment acumen to fund their retirement, Vanguard’s McNabb said.

“If [the workers] make money in their 401(k), that’s just icing on the cake,” he said.

But the number of firms that offer both 401(k)s and pensions is declining. A Hewitt survey of large companies that offer 401(k)s found that 54% also offered pensions last year, down from 67% in 1999.

But workers at companies that provide pension plans may not qualify for benefits, Friedman of the Pension Rights Center said.

Employees typically don’t qualify for pension benefits for five years or more, and full benefits--which can replace 20% to 70% of a worker’s salary--can take 20 years or more to earn, assuming the employer doesn’t change the plan in the meantime.

Investments in company shares aren’t always strictly voluntary. General Electric and Exxon match their workers’ contributions with cash, but some companies make matching contributions in company shares, as Enron did. Enron and other companies also restrict employees from selling those shares--typically until age 50 or 55, although some plans don’t allow company stock sales until retirement.

Many retirement plan experts, along with legislators and even some companies, question the wisdom of such restrictions, given the Enron fallout.

“A lot of companies are examining the way they match [contributions], and whether they should allow employees to diversify more quickly” by ending restrictions on selling company shares, Vanguard’s McNabb said.

One company that isn’t contemplating changes is Philips Electronics. The New York-based subsidiary of Amsterdam’s Koninklijke Philips Electronics has avoided offering company shares in its 401(k) plans--despite pleas from workers at some of the high-tech firms Philips has acquired over the years, said Lisa Pyne, the company’s benefits director.

“There is a culture of stock ownership in high-tech firms,” Pyne said. “But we want to make sure our employees diversify their assets.”