Retirement Account Safeguards Founder
Congress has all but abandoned legislative proposals to ensure that employee retirement funds are not concentrated in their employers’ stock, after hearing from businesses that vigorously oppose such restrictions.
The recently devastated retirement accounts of employees at Enron Corp. and WorldCom Inc. initially fueled a wave of indignation among lawmakers in Washington and solemn vows to protect their investments. But the anger that pushed tough new accounting standards past corporate opponents this summer has already faded, lawmakers and lobbyists say, allowing businesses to regain their strength on Capitol Hill.
Now, legislation taking shape would allow employees with company stock in their retirement accounts to sell it after three years of employment, would encourage companies to provide more investment advice and would prevent corporate executives from selling company stock in secret or in periods when employees are forbidden to sell.
But unlike federal laws covering traditional pension plans, the new 401(k) legislation almost certainly will not mandate diversification of investments.
“I’m not that concerned,” said Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce, which lost the fight over the accounting bill but joined a campaign against tougher pension measures.
Consumer-rights groups, unions and retiree advocates, which were confident that the toll on workers from this year’s huge bankruptcies would force real change to the rules, expressed outrage.
“I think it is appalling, and I think the American people would be appalled if they knew,” said Karen Friedman, director of policy strategies at the Pension Rights Center, an advocacy group that supports such mandates. “It’s time for Congress to have some backbone.”
The collapse of Enron and WorldCom rattled stock markets and shook investor confidence. But those who were hurt most might have been employees who had invested virtually all of their retirement savings in company stock, then lost their jobs and their nest eggs at once.
Through the bull market of the 1990s, companies became increasingly reliant on bolstering their employees’ retirement accounts with their own stock, by matching employee contributions with stock and by allowing employees to buy into the companies on their own. Of the $698 billion in assets that publicly traded companies and their employees invested in 401(k) plans by 1998, $273 billion--nearly 40%--was in company stock.
In the bear market of 2002, such investments have been disastrous for many workers. Osman Guven, an employee of WorldCom and its predecessor companies for 31 years, had a relatively diversified 401(k) account in the early 1990s. But, the San Jose systems administrator said, he heard the pitch from executives about the company’s future. He read the memos from then-Chief Executive Bernard J. Ebbers touting WorldCom’s boundless potential, and he saw the company’s stock price rise.
He slowly shifted his investments into WorldCom, until his entire retirement account was bound up in company stock.
On June 28, he was laid off with tens of thousands of other WorldCom employees. Not only had he lost his job, he lost $380,000 in retirement savings, as WorldCom stock plunged.
“I get up in the middle of the night saying, ‘How am I going to rebuild?’ ” Guven said. “I’m 57 years old. How am I going to restart my whole life?”
In response to such stories, Congress and President Bush vowed earlier this year to secure private retirement accounts. Bush proposed three broad principles: give employees the right to sell company-issued stock, provide more investor education and make sure employees have the same rights as corporate executives.
Sens. Jon Corzine (D-N.J.) and Barbara Boxer (D-Calif.) went further, moving to cap retirement-fund holdings of an employee’s company stock at 20%.
Corporate lobbyists, Republican leaders and some Democrats strenuously objected. Then Sen. Edward M. Kennedy (D-Mass.) came up with a considerably weaker proposal: A company could either match 401(k) contributions with company stock, or it could allow employees to invest in company stock on their own, but not both. But the idea was opposed not only by Republicans but also by Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee. Business lobbyists said it would raise costs enough to convince some employers to reduce company contributions or withdraw their 401(k) plans altogether.
Business groups say granting company stock makes employees more loyal. By using company stock instead of cash to match employee contributions, firms avoid dipping into their reserves.
Kennedy is trying to preserve his proposal by giving employers a large escape clause. Under the most recent compromise, companies would be allowed to match with company stock and let employees invest on their own if they also offer a traditional pension plan, offer independent investment advice or require employees to approve the purchase of company stock on top of a stock match.
Baucus said the legislation taking shape in the Senate would change investment behavior without mandates. The bill would require that companies advise employees against over-concentration in any one stock and warn them when they are over-concentrated. The bill also would mandate quarterly benefit statements and would make it easier for companies to offer employees independent investment advice.
David Certner, a lobbyist for senior citizens advocacy group AARP, has his doubts.
“The bottom line is, while you might have made some improvements to the law, you will not have substantially changed the environment that created the problem to begin with,” he said.
