401(k) Reform: Is the Market Correcting Itself?

When it comes to 401(k) reform, large corporations are one step ahead of Capitol Hill. In the wake of the Enron blowup, they're scurrying to make themselves look responsive to potential concerns of their workers.

Companies such as Lucent LU, Mellon Financial MEL and AOL Time Warner AOL are already fixing potential trouble spots, such as restrictions on company stock. These actions could sap some of the momentum for political reform, which in itself is good news for 401(k) investors. The caveat is that for now, employers are moving cautiously on one of the areas in most urgent need of reform: giving workers advice about how to invest.

It's all the more crucial that companies step up to the plate, because it's starting to look doubtful that Congress will pass a pension reform bill. Though a bill has passed the House, the Senate plans to roll post-Enron pension and accounting reform together into one giant bill. That's likely to make it tougher to achieve broad support for the legislation.

"That probably won't go [anywhere] until the fall," says Brian Graff, executive director of the American Society of Pension Actuaries. "And when you get into the fall, that close to an election, it's hard to do anything of that magnitude."

A Case of the Market Correcting Itself?

In the meantime, companies have pushed ahead with some basic 401(k) reforms on their own. As companies see it, taking action now makes them look responsive, helping them maintain friendly relations with workers. That, in turn, could undercut the momentum for burdensome regulatory edicts. And surprisingly, they say their employees have voiced few complaints about restrictive 401(k) policies.

"Companies are probably more worried about their image -- how it looks -- than necessarily their own employees pushing it," says Dan Cassidy, president of Concord, Mass.-based Argus Consulting, a retirement consulting group.

Take Lucent. The company says it decided to lift restrictions on its stock for union workers in response to general public concerns, not because workers had complained. "We also feel these changes allow us to proactively manage the terms and conditions of our 401(k) ahead of any legislative decision," says spokesperson Bill Price.

In a companywide email announcing similar reforms, Mellon Financial Bank CEO Marty McGuinn justified the changes not as a response to complaints from its own employees, but rather to "media stories," which he said had raised concerns about the role of employer stock in retirement plans.

Moves toward reform show the market correcting itself, contends Edward Ferrigno, a vice president in the Washington office of the Profitsharing/401(k) Council of America, an association of employers with defined-contribution plans. "Companies are rational. You need only to look at what has happened about transparency in company reports since Enron happened. It has nothing to do with the Hill and everything to do with the market, which has made it perfectly clear that it's not going to tolerate any hanky-panky in reporting."

Reforms Center on Company Stock

In the absence of political mandates, companies are making the easiest and most obvious changes: easing restrictions on company stock. A survey of nearly 300 companies by consulting group Hewitt Associates found that in just the first quarter of 2002, 13% of respondents had eased their restrictions on the sale of company stock.

Reforms typically involve scrapping the requirements that employees be a certain age (often 55) and must have worked for a given period at the company before they're allowed to sell company matching funds in their 401(k)s.

Those changes are likely to play well with employees. "People, once they're in a 401(k), should have control over whatever they're given," says Gerry Grodecki, who retired from Lucent last summer. As a former manager, he received matching contributions in cash, which he could invest however he wanted. "If they had matched contributions with stock and said I couldn't have sold it for five years like Enron, I wouldn't have liked it at all," he says.

In fact, Lucent's policy until recently has been to give its union employees matching contributions in company stock. But starting May 15, it will move to cash instead, so all employees receive the same treatment.

Leave the Hard Stuff for Later

Despite the rush to reform rules on company stock, employers are moving more cautiously in another area ripe for reform: giving their workers guidance about how to invest. That's a tricky proposition, because companies fear being sued if they give advice on an investment that turns sour.

For that reason, most have taken only the most tentative steps towards offering more advice. Mellon has simply told employees it's looking into ways to give financial planning information. At AOL, the company says its goal is to offer additional online and in-person seminars in the future.

The one subject on which employees need the most help is the toughest for companies to handle: investing in company stock, an area ridden with conflicts of interest. Companies must walk a tight line between encouraging employee ownership and abiding by Regulation FD, which prevents them from releasing selective information. "If they're telling employees something a little less rosy than the public in general, that's a problem under securities laws," says David Pratt, a professor at Albany Law School and senior editor of the Journal of Pension Benefits.

Employers also have to balance a tendency to tout their own stock with their obligation to explain the merits of diversification. Yet often, the trustees of a company's retirement plan -- the same people who are supposed to ensure that it is invested prudently -- hail from its upper-level management. "Say the stock is plummeting," says Cassidy. "When should a fiduciary step in and say, 'You know what, the company stock is actually a bad investment. You should investment elsewhere?' "

In the future, he says, employers will be more likely to appoint outsiders as trustees of their retirement plans. But changes like these could take a while.

The bottom line: While it's great that companies are ditching unnecessary restrictions on their 401(k)s, it's only the beginning. Employers will need to do much more to restore the plan's tattered image.