In Enron's wake: after congressional reforms, retirement plans will still have risk. Could voluntary employer matching suffer?

• Author: McKimmie, Kathy
• Position: Employee Benefits

At the crux of the Enron pension debacle was the heavy investment in company stock in employees' 401(k) plans. When the stock lost 98 percent of its value in 2001, employees suffered severe losses.

Enron's troubles, however, don't mean the entire 401(k) system is in crisis. After all, the same dynamic doesn't exist in most 401(k)s. Only 2,000 plans contain company stock, an estimated 338,000 do not. Dallas Salisbury, president and CEO of the 24-year-old, D.C.-based research firm Employee Benefits -- Research Institute (EBRI), urged lawmakers in his testimony to a congressional committee in February to look at the financial silver lining in all this: the new attention given to education, advice, diversification and financial literacy.

This year, employees can defer up to $11,000--pretax--into their 401(k) retirement savings account (up from $10,500 in 2001), and will typically select from a list of investment opportunities approved by their company's investment committee. Account balances fluctuate depending on the employee's contribution level and investment choices.

Although it's not mandatory, many employers match part of the employee s deferral, typically 50 cents on the dollar up to 6 percent of pay. In Enron's case, as with many stock companies, the employer match was made not with cash, but in company stock with restrictions on its sale until age 50. But the meteoric rise in Enron's stock price tempted employees to voluntarily switch much of their own investment to company stock as well.

Did Enron employees need to lose "everything," as has been reported? "Greed comes into play," says Jeff Rose, principal and consulting actuary with Buck Consultants in Fort Wayne, who notes the Enron stock price was $30 in February 1999 and $90 in October 2000. "That kind of loss could only occur if they'd invested their own money in Enron stock."

Compounding the problem was more than a three-week "blackout" period beginning in late October, during which changes in employee investments could not be made while the company was switching plan administrators. There are no rules governing the length of blackouts, and a survey of certified employee benefit specialists by EBRI after Enron's collapse showed blackout timeframes range from as little as "no delay/ overnight/over weekend" (3 percent) to more than two months (5 percent). But the largest block of employers were in sync with Enron--36 percent imposed a two-to four-week timeframe. Setting a short...