aNoNo
01-24-2002, 08:43 AM
The first two of at least eight Congressional hearings on Enron kick off today, an embarrassment of political riches. We're as curious as anybody to learn what was
going on behind Enron's accounting kimono, but in the meantime we've been taking a peek ourselves at other parts of the company's anatomy.
In particular, we've looked into the alleged problems with Enron's pension plan, the source of much hot populist rage. What we've learned is that, at least in this part
of the Enron debacle, the reality isn't nearly as awful as some of the headlines. Consider some of the facts:
Enron's pension plans followed standard practices of most big, publicly traded firms. Enron offered several arrangements -- from employee stock-option plans to defined benefits -- but the one that has everybody outraged is its 401(k).
Enron's employees could set aside up to 15% of their pretax salary in a 401(k), up to the IRS limit of $10,500 last year; they could put the cash into one of 20 different investment vehicles, including mutual funds and a brokerage account. Workers controlled this money in their own self-directed accounts and were free to switch among investments or even cash out (with a tax penalty).
Enron had about 24,000 workers world-wide before bankruptcy and about half of them participated in the 401(k). So we're talking about 11,000 employees and a plan with about $1 billion in total assets, of which from $500 million to $600 million was invested in Enron stock.
Enron also matched up to half of these worker contributions, up to 6% of base pay. But it matched in Enron stock, and employees were required to hold this matched stock until age 50. That limitation has come in for criticism, but keep in mind the stock was free. Some politicians want to stop companies from matching in stock, but the danger is that they then won't match at all.
This arrangement is also fairly typical of big plans. About half match with company stock and half with cash. General Electric's plan offers a cash match, for instance,
but about three-quarters of its workers use that money to buy company stock.
Contrary to the headlines, Enron employees were not forced to watch helplessly as the value of their stock cratered, trapped by a malicious "lockdown."
A lockdown, more properly a "transaction suspension period," occurs when companies change record keepers. Transactions are barred for a time so the new record keeper can verify account accuracy and make a reconciliation. Lockdowns can last anywhere from a few days to two months, depending on the size of the plan, its complexity and the sophistication of the record keepers. Last year, 24,000 private investment plans changed record keepers.
Most important, Enron notified employees of the coming lockdown several times -- first by mail and then by four separate e-mails. Enron shares were still trading in the $30 range at this time, when workers had ample opportunity to sell. The lockdown itself started Oct. 26 and ended Nov. 13, so workers were locked out for only 11 stock-trading days. And during that time Enron's stock fell from $15.40 to $9.30, a rather small decline for a stock that had already lost almost 70% of its
value during 2001.
401(k) plans do not promote dangerously undiversified portfolios. Diversification is an important financial tool, permitting investors to reduce risk without reducing expected returns. In long-term financial planning, it makes excellent sense to hold a portfolio that is diversified across a range of assets.
But diversification is also a highly individual thing. Strategies depend mostly on age; a person nearing retirement should hold fewer risky assets than one starting a
career. But after adjusting for age, all assets should be considered together. For example, a person who is heavily invested in real estate might want to achieve
balance by a single-minded approach in other vehicles, like ginning up her 401(k) for equities.
That doesn't mean holding 100% of equities in company stock is a great idea. But then again if the rest of an investor's equity portion is well-diversified, such a concentration isn't crazy. In hindsight, a 100% concentration in Microsoft made a lot of sense and lot of millionaires. A 100% concentration in Enron also made
sense for a while; from January 1998 to January 2001, Enron's shares increased fivefold.
Enron's 401(k) experience does not indicate that the plan is fiendishly flawed and government must step in to correct it. If workers knew Enron's true condition, they would no doubt have declined to invest in company stock in their self-directed accounts. The problem is that they didn't know the true condition of Enron, but then neither did the credit rating agencies, various federal overseers, stock analysts, auditors and (possibly) even much of its senior management. This was a failure in truth-telling and truth-ferreting out and it was system wide.
All of which means that while the Enron pension story is tragic, it's more about specific corporate blunders and wrongdoing than it is about flaws in pension law or in
401(k)s. It's certainly no excuse for Congress to lobotomize a private pension system that has given millions of Americans a comfortable retirement.
going on behind Enron's accounting kimono, but in the meantime we've been taking a peek ourselves at other parts of the company's anatomy.
In particular, we've looked into the alleged problems with Enron's pension plan, the source of much hot populist rage. What we've learned is that, at least in this part
of the Enron debacle, the reality isn't nearly as awful as some of the headlines. Consider some of the facts:
Enron's pension plans followed standard practices of most big, publicly traded firms. Enron offered several arrangements -- from employee stock-option plans to defined benefits -- but the one that has everybody outraged is its 401(k).
Enron's employees could set aside up to 15% of their pretax salary in a 401(k), up to the IRS limit of $10,500 last year; they could put the cash into one of 20 different investment vehicles, including mutual funds and a brokerage account. Workers controlled this money in their own self-directed accounts and were free to switch among investments or even cash out (with a tax penalty).
Enron had about 24,000 workers world-wide before bankruptcy and about half of them participated in the 401(k). So we're talking about 11,000 employees and a plan with about $1 billion in total assets, of which from $500 million to $600 million was invested in Enron stock.
Enron also matched up to half of these worker contributions, up to 6% of base pay. But it matched in Enron stock, and employees were required to hold this matched stock until age 50. That limitation has come in for criticism, but keep in mind the stock was free. Some politicians want to stop companies from matching in stock, but the danger is that they then won't match at all.
This arrangement is also fairly typical of big plans. About half match with company stock and half with cash. General Electric's plan offers a cash match, for instance,
but about three-quarters of its workers use that money to buy company stock.
Contrary to the headlines, Enron employees were not forced to watch helplessly as the value of their stock cratered, trapped by a malicious "lockdown."
A lockdown, more properly a "transaction suspension period," occurs when companies change record keepers. Transactions are barred for a time so the new record keeper can verify account accuracy and make a reconciliation. Lockdowns can last anywhere from a few days to two months, depending on the size of the plan, its complexity and the sophistication of the record keepers. Last year, 24,000 private investment plans changed record keepers.
Most important, Enron notified employees of the coming lockdown several times -- first by mail and then by four separate e-mails. Enron shares were still trading in the $30 range at this time, when workers had ample opportunity to sell. The lockdown itself started Oct. 26 and ended Nov. 13, so workers were locked out for only 11 stock-trading days. And during that time Enron's stock fell from $15.40 to $9.30, a rather small decline for a stock that had already lost almost 70% of its
value during 2001.
401(k) plans do not promote dangerously undiversified portfolios. Diversification is an important financial tool, permitting investors to reduce risk without reducing expected returns. In long-term financial planning, it makes excellent sense to hold a portfolio that is diversified across a range of assets.
But diversification is also a highly individual thing. Strategies depend mostly on age; a person nearing retirement should hold fewer risky assets than one starting a
career. But after adjusting for age, all assets should be considered together. For example, a person who is heavily invested in real estate might want to achieve
balance by a single-minded approach in other vehicles, like ginning up her 401(k) for equities.
That doesn't mean holding 100% of equities in company stock is a great idea. But then again if the rest of an investor's equity portion is well-diversified, such a concentration isn't crazy. In hindsight, a 100% concentration in Microsoft made a lot of sense and lot of millionaires. A 100% concentration in Enron also made
sense for a while; from January 1998 to January 2001, Enron's shares increased fivefold.
Enron's 401(k) experience does not indicate that the plan is fiendishly flawed and government must step in to correct it. If workers knew Enron's true condition, they would no doubt have declined to invest in company stock in their self-directed accounts. The problem is that they didn't know the true condition of Enron, but then neither did the credit rating agencies, various federal overseers, stock analysts, auditors and (possibly) even much of its senior management. This was a failure in truth-telling and truth-ferreting out and it was system wide.
All of which means that while the Enron pension story is tragic, it's more about specific corporate blunders and wrongdoing than it is about flaws in pension law or in
401(k)s. It's certainly no excuse for Congress to lobotomize a private pension system that has given millions of Americans a comfortable retirement.