'Fixing' the 401(k) could make it worse


JAPANESE families save more than 10 percent of their incomes for retirement, home purchases and the like. American families last year saved 1.6 percent of their incomes - and that was a big improvement from the year before.

The Enron mess has spurred the notion in Washington of a crisis in 401(k) plans, which are common pension and savings vehicles named after part of the tax code. But the real crisis is the U.S. savings rate and whether the nation can afford the retirement of the baby boomers starting in another decade or so.

If Congress "fixes" the 401(k) problem in a way that cuts corporate contributions to pension accounts - a serious risk given some of the bills on the table - the cure will be worse than the bug.

As usual, Congress is having a difficult relationship with the facts.

Egged on and misled by our friends the TV personalities, much of Washington thinks Enron workers were forced to lock up all their 401(k) money in company stock while rich executives, playing under different rules, sold Enron shares willy-nilly.

CNN's Kitty Pilgrim helpfully suggested that there was a "401(k) hostage situation" at Enron. Now that's how to make a pension story interesting. Kitty's blouse looked really cute, too.

"Enron's employees invested in their own company's stock," reported CNN's Lou Dobbs, "but unlike top management, they faced much tougher rules when it came to selling their holdings."

Not really, Lou. Top Enron managers were the ones subject to stricter stock-selling laws, not employees. The executives' 401(k) money was subject to the same constraints as that of rank-and-file workers, and all the executives' company stock sales - pension and nonpension - were sharply restricted by rules governing corporate insiders.

Top Enron bosses were indeed selling shares in the months and years before the company imploded, but many of the transactions were run-of-the-mill stock-option exercises, and they represented a small portion of overall executive holdings.

When Enron stock bit the dust, nobody lost more money than the guys at the top.

Much of the attention and proposed remedies have focused on a two-week "blackout period" in October and November when Enron was changing 401(k) administrators and workers were prevented from selling shares.

"We hear that you couldn't sell stock for a six-week period of time. What was that all about?" Fox's Bill O'Reilly asked a former Enron employee.

Two weeks, Bill. Two weeks.

What it was all about was a routine change that was relatively immaterial to the fortunes of Enron workers.

Enron stock cratered before the blackout, falling from $80 in the spring to $13.81 the day before the freeze. By the time Enron workers were able to trade two weeks later the stock had fallen further to $9.98 - a substantial decline, but a relatively minor event in the Enron meltdown.

Some have proposed banning 401(k) blackouts, which would cause administrative horrors and quash competition by discouraging employers from switching vendors. Freezing accounts is crucial when changing plan managers, and it's a non-event 99.99 percent of the time, involving, as it does, long-term investments.

Other 401(k) fixes would limit or discourage contributions of employer stock in 401(k) funds or other pension plans.

It's true that 58 percent of the assets in Enron's 401(k) plan at the end of 2000 was in Enron shares, which proved disastrous for employees who should have been more diversified.

But the employees weren't forced to own so much of Enron. Some of the stock was given by the company - with a ban on selling until age 50 - to match employee deposits. But much of it was voluntarily purchased by workers, and it could have been sold at any time.

The workers were wrong to bet heavily on the Houston-based energy giant, but their problem wasn't the 401(k) plan. Their problem was the same problem all the other shareholders had: Enron's accounting and honesty.

What needs to be fixed here is the corporate financial disclosure system, not the widespread practice of sharing corporate ownership with lower-level workers.

For years liberals have complained that the average worker hasn't enjoyed the same gains as shareholders. The establishment listened, and these days hundreds of companies give - give! - pieces of themselves to the rank and file.

Now people like California Sen. Barbara Boxer want to reverse the progress by halving the corporate tax deduction on stock donations. Stock ownership comes with both benefits and risks, Senator. You can't have it both ways.

Much of the Enron 401(k) debacle will fix itself. Nothing Wall Street has produced can rival the sad stories of the Enron employees as an ad for the benefits of diversification, and the raft of Enron lawsuits is nudging 401(k) chiefs at other companies to take a hard look at the quality of their plans.

This isn't to say that some 401(k) tweaking can't be done. Stock contributions that match worker deposits are fine, but contributors shouldn't be forced to buy company stock with their own cash. (At Enron, they weren't.) And I like the bills that would let workers sell restricted company stock after a few years.

But much else would be overkill. The more Congress tries to protect workers from 401(k) disasters, the more it will discourage firms from matching worker contributions and boosting the savings rate.

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