Enron Losses May Inspire 401(k) Reforms

Dec. 4, 2001 -- Roger Boyce believed so much in the future of his employer of almost 30 years, the troubled energy company Enron, that he put all of his 401(k) funds in the company's stock.

But that's not all. Boyce also purchased shares in Enron stock as part of a company stock option plan over the years. In addition, he received some 15,000 shares in Enron stock as an outright gift from the company, as well as the stock contributions the company matched in his 401(k) plan.

All told, Boyce, a 67-year-old retired Enron employee living in Minneapolis, owns between 25,000 and 26,000 shares of the company's stock. At the end of last year, that was worth around $2 million. It is now worth under $10,000.

Boyce says now that his most crippling mistake was not diversifying his retirement funds into other investments. But at the time, his loyalty and faith in the company, along with continuous opportunities to accrue more and more Enron stock, kept him putting more of his eggs in one basket.

"Enron continued to be very, very strong during that time," say Boyce. "The thinking was why should I put something in money markets at two or three percent when I can have Enron?"

Devastating Losses

With the crippling losses suffered by many Enron employees like Boyce in their retirement funds as a result of the company's devastating stock plummet, some industry watchers are calling for changes in the way 401(k) retirement funds are regulated.

One of the key questions is whether or not there should be a limit on the amount of company stocks that employees can hold. Some, like Eli Gottesdiener, principal of the Gottesdiener Law Firm, a Washington, D.C.-based firm representing Enron workers in a lawsuit against the company, suggest capping the amount of company stock an employee can own at 10 percent of their assets, or five percent if the company awards matching stock.

"We have laws that people have to wear seatbelts," argues Gottesdiener. "We have seen that trying to tell people you don't put all your eggs in one basket doesn't work. Employers pump their stock and employees forget common sense."

Stock options have become an increasingly popular way for companies to compensate their employees in recent years. A survey of 25 large companies by Hewitt Associates showed that roughly 30 percent of their $71 billion in their employees' 401(k) accounts was held in company stock, both given by the company and purchased by the employees themselves.

In some cases, the amount of company stock held by workers is even higher. Some Enron employees had over 60 percent of their retirement savings invested in Enron stock, according to the Gottesdiener.

One problem, say some experts, is that employees take grants or matching contributions of stock as a sign to load up on company shares. Other companies that match 401(k) contributions with stock include Gillette, Coca Cola, Procter & Gamble and Disney, the parent company of ABCNEWS.com.

"One of the things I found is, when the match is invested in company stock, the employees take that as an implicit signal," says Shlomo Benartzi, assistant professor of accounting at The Anderson School at UCLA. "I call it the endorsement effect, and they invest more of their money in the company stock."

Reforms Proposed

Some efforts are already underway to provide employees more education about how to manage their retirement accounts. Legislation to provide independent investment advice to workers was introduced two weeks ago by Sens. Jeff Bingaman, D-N.M., who sits on the Senate Committee on Finance and the Committee on Health, Education, Labor and Pensions, and Susan Collins, R-Maine. Industry watchers expert more proposals to emerge in Congress in response to the Enron debacle.

"It's certainly incumbent upon us to give more information here," says David Certner, director of economic issues for AARP, formerly known as the American Association of Retired Persons, which supports Bingaman's bill. "That may mean, being a lot more specific to folks about what high concentrations mean to a diversified portfolio."

Another idea emerging is to eliminate the limits on how long employees must hold a stock before they can sell. In the Enron case, employees could not sell their stock holdings until they reached the age of 50, says Gottesdiener. An Enron spokeswoman did not return calls seeking comment.

"If the employer is going to match in employer stock, as soon as the vesting period is over, there should be legislation that permits workers to sell the stock," says Gottesdiener.

Adds Certner, "Here the [401(k)] is supposed to be a self-directed plan, but it makes no sense to tell people you have all the risk and all the responsibility but you can't do anything with it."

Same as It Ever Was?

Whether or not such proposals will actually result in change is another question. Some, like Mercer Bullard, a former Assistant Chief Counsel in the SEC's Division of Investment Management and founder of Fund Democracy, a shareholder advocacy group based in Chevy Chase, Md., are not so optimistic.

"I see no reason why this case would be any different, unless there's a new law and a judge who's willing to buck precedent," says Bullard. "In two years this will happen again."

But others argue that the high-profile nature of the Enron case — the company's bankruptcy is the largest in U.S. history — and the devastating losses suffered could spur politicians and lawmakers to do more.

And for Roger Boyce, limits would insure that younger generations would not have to go through the losses that he has experienced first hand.

"From a personal standpoint, I feel that the employees needed some kind of spokesman to express their feelings all the way from just outright bitterness to unbelievable mistrust," he says. "I've talked to many employees and retirees in last week week and a half. Some of them have lost everything."

ABCNEWS' Michele Norris contributed to this report