With thousands of
employees having lost not only their jobs but also most of their retirement savings, President Bush has called for action to prevent the same fate for millions of other Americans who have some or all of their retirement savings invested in their own company stock.
Recent Meet the Streets
Entrepreneur and author
Credit Suisse First Boston's
University of San Francisco's
The new presidential council will draw upon experts from the Department of Labor, the Department of the Treasury and the Commerce Department to take a closer look at the rules and regulations governing the nation's pension and 401(k) plans -- otherwise known, respectively, as defined benefit and defined contribution plans.
James A. Klein, president of the American Benefits Council, the country's leading trade association of employers offering such plans (and as such, representing the retirement savings of 100 million Americans), believes creating the council is a wise move on Bush's part. Here, Klein tells Meet the Street what thorny issues he expects the presidential working group to delve into, including current rules on how much you can put into your company's stock, and whether investment education and advice in 401(k)s might improve as a result of the council's formation.
Last but not least, Klein weighs in on why the disaster at energy-trading giant Enron, now bankrupt, proves unequivocally why a diversified portfolio is now more important than ever. While he calls President Bush's decision to revisit the nation's 401(k) and pension laws "the careful -- and right -- course of action" -- he warns against new laws that could restrict individuals' rights to invest heavily in their own companies' stock.
Many Microsoft employees, after all, Klein notes, became millionaires by buying stock in the company before it became the world's leading software firm.
TSC: President Bush is putting together this working group to look into some of the weaknesses in the nation's pension and 401(k) laws, in light of the evaporation of much of Enron (ENE) employees' retirement savings. What are some of the issues that you expect this presidential council to look into?
I don't know that I would agree with the premise that there are weaknesses in the system. One important problem that does occur in some places, but not universally across the pension system, is some participants' lack of diversification, not only of their retirement assets, but of their assets overall. That is clearly an area that the president's advisers, I'm sure, are going to take a look at. And we applaud them for doing that.
TSC: What are the current rules regarding the maximum allowances for an employee to invest in their employer's stock? Do you expect any changes there, again, in light of the disaster at Enron?
In traditional defined benefit pension plans where the employer is responsible for paying a certain prescribed amount of benefit, there is a 10% limit on how much of these assets can be in company stock. But in a 401(k) plan, it's not applicable either for the company match or for the individual's own voluntary contributions. A plan on its own can establish such a limit. But the law does not require it.
where 401(k) plans are concerned is the plan is not paying a promised amount of benefit, and the employer contributions are strictly voluntary, and the employee's contributions, why, that's their own money. Of course, there are some elements of limits as to how much they can invest in
, let alone their own company's stock.
Again, it's the importance of diversification -- not being too heavily weighted in
one stock. There certainly is an interest among many of the parties in Congress to make some changes to
company stock ownership allowances in 401(k)s, but there are a lot of dangers in imposing a federal legislative limitation on the amount of company stock that can be in a plan.
And these are dangers that could end up resulting in more harm than good: There are
modest-income workers who have accumulated a tremendous amount of wealth because they had the benefit of being invested in their own employer's stock,
being just one in many instances where employees have done extremely well by being invested in their own company's stock.
So I don't think it would be prudent for Congress to undermine those kinds of successes, by overreacting to one, admittedly, very tragic situation. Moreover, because employer matches are strictly voluntary, there's a real danger that some companies could not provide an employer match, or provide a less-generous match.
TSC: What about the issue of corporate disclosure, which President Bush highlighted as one of this council's key mandates?
Most of the disclosure that's been talked about is not relevant to the benefit plans, but general corporate disclosure, which certainly is not an area that our organization focuses on.
TSC: What about the educational materials, and in some cases investment advice, that now comes bundled in with many defined contribution plans? In some cases, this information is coming from neutral third parties, but in others, it's from one or more of the mutual fund companies in the plan itself. Is this potentially another area for this new presidential council to look into?
Investment education is generally construed to be providing information about the importance of saving for retirement, diversification, things of that nature, whereas investment advice is much more particularized information about how an individual might wish to select their investment choices.
One of the "silver linings" that might emerge from this dark cloud is a renewed emphasis and focus on the importance and value of diversification of one's investments, and the importance of doing more in the area of investment education
There has already been legislation that passed the House of Representatives last year to liberalize the rules to permit more investment advice to be provided. There is somewhat different legislation that has been introduced in the Senate. And hopefully, a reasonable bill will emerge from Congress in the not-too-distant future that makes it possible for participants to get helpful investment advice to better make their plans.
TSC: Some companies that do not have 401(k) plans have company stock ownership plans instead. Is
potentially another area for review?
Some companies have employee stock-ownership plans where the plan is comprised of the company's stock. That can be part of a retirement plan or not. There also are 401(k) plans where the employer makes their match in company stock. I am not aware of any 401(k) plan where all the employer, and all the employee contributions, would be in company stock.
point to note is that those companies providing the employer match in the 401(k) plan in the form of the employer's own stock are companies that also sponsor one of those defined benefit pension plans. So, these
employees are people who have both a 401(k) plan
a pension plan, where the money is in trust and guaranteed by the federal government. So there is a much higher level of overall retirement security for those people.
TSC: Company restrictions aside, what would you say to a person so enthusiastic about their employer that they put all of, or a good deal of, their money in their employer's stock?
I would tell any investor it's not wise to put their eggs in only one basket. Certainly, it's understandable that people may feel they know more about their own company, but if that company should fail, as we've painfully seen with Enron, they may find themselves unable to retire.
And it would be just as less prudent for a person to put all their money in another, outside company, about which they might know even less.