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Enron sparks 401(k) debate
By SCOTT BARANCIK, Times Staff Writer The meltdown of Enron Corp. has started a national debate over proposals to limit how much company stock can be held in a 401(k) retirement account. As much as 60 percent of the Houston energy trader's 401(k) plan was invested in its own, now-worthless stock. The retirement dreams of many of its 21,000 employees were crushed. But a survey of some of the Tampa Bay area's largest employers suggests there may be no easy answer. Consider these examples: Verizon Communications, the New York phone company that employs about 13,400 workers in the bay area, has a 401(k) resembling Enron's. About half of Verizon's 401(k) assets are invested in its own stock, far more than the 10 or 20 percent many financial advisers recommend. And Verizon makes employees wait until age 50 to sell shares that the company contributes to the plan. Raymond James Financial Inc., a St. Petersburg brokerage with 4,000 local employees, does not let its 401(k) participants invest in company stock. It also matches employee contributions in cash, not stock. As a result, none of its 401(k) assets is invested in Raymond James stock. Which of these plans needs fixing? According to proposals before Congress, Verizon is the obvious candidate. Several bills would prohibit a company from letting its own stock account for more than 10 or 20 percent of 401(k) assets. Other proposals, including one advocated by President Bush, would cap the no-trade period on company-matched stock at anywhere from 90 days to 3 years. But there's more to the story. Though Raymond James doesn't include company stock in its 401(k), it makes an annual gift of stock to all employees through a stock-ownership plan, typically 2 percent of earnings. Employees are not allowed to trade that stock until age 55. A separate plan lets employees set aside up to 20 percent of their salary to purchase discounted company stock. So Raymond James employees who are believers in the company can end up with a big chunk of their retirement savings dependent on how the company fares in the stock market. (The company also has a profit-sharing plan that includes a generous cash contribution and only a small amount of company stock.) And while Verizon's 401(k) may be chock full of company stock, its retirees also receive a traditional, company-funded pension -- only 1 percent of which is invested in company stock -- and subsidized health insurance. Its 401(k) match is bigger, too. Raymond James' maximum match on a $50,000 salary is $750; Verizon's is $2,500. "I can't say the company's concerned about the 401(k)," Verizon spokeswoman Sharon Cohen-Hagar said. Verizon isn't alone None of the companies contacted for this report acknowledged post-Enron plans to adjust its 401(k) plan, the retirement vehicle first used in 1981 and named for its place in the federal tax code. At most, the companies pledged to remind employees of the importance of keeping a diversified portfolio. "We've seen what happened with Enron's employees, and it's certainly a harsh lesson on the importance of diversification," said Keith Poston, spokesman for Progress Energy Inc. of Raleigh, N.C., parent of Florida Power. A year ago, Progress stopped requiring that employee 401(k) contributions include a minimum percentage of company stock. Yet more than half of the company's 401(k) remains in its own stock. Company programs offering free or cut-rate stock can be a good deal for employees. Enron employees certainly weren't complaining when the company's once-stratospheric stock turned many of them into paper millionaires. Some companies may not be able or willing to make a cash contribution to a 401(k), so it's stock or nothing at all. Stock market popularity alone can drive up the share of a retirement portfolio that's in company stock. Take a company whose 401(k) is made up of 80 percent mutual funds and 20 percent company stock. If the stock's price were to double while the broader funds stayed put, the company stock would rise to 33 percent of total assets. Stock market gains are part of the reason the 401(k) at Tech Data Corp. of Clearwater, a computer hardware and software distributor, includes 38 percent company stock. Companies benefit when employees hold stock because they represent a stable, supportive and often captive group of investors. The companies also get to take tax writeoffs for stock they give to employees. For example, Verizon may qualify for as much as $30.5-million a year in related tax breaks, according to the Institute of Management and Administration. Employees may buy stock that's offered to them out of the same gung-ho enthusiasm for their company that makes them cheer at corporate pep rallies. They also can be subjected to direct pitches. At Enron, chairman Kenneth Lay urged employees to buy more stock even as he sold millions of dollars of his own company holdings. At a congressional hearing Tuesday, lawmakers showed a videotape of a meeting where an Enron employee asked if all of a 401(k) should be invested in the company. "Absolutely," an executive said as chief executive Jeffrey Skilling smiled and nodded approvingly. Still, it's the employees who often make the decision to load up on company stock. At Verizon, $3 out of every $5 worth of company stock in the 401(k) was put there by employees, who have roughly 20 other investment options to choose from, according to Cohen-Hagar. There is nothing stopping them from selling that stock, either. By law, stock an employee purchases with his or her own contribution may be diversified at any time. Companies that are major employers in the bay area have a wide range of stock plans. At Jabil Circuit Inc. in St. Petersburg, none of the 401(k) is in stock, although employees can buy discounted Jabil stock through a separate purchase program. Outback Steakhouse Inc. of Tampa contributes cash, not stock, to 401(k) accounts, but voluntary employee purchases of the stock account for 30 percent of the retirement plan's net assets. Tech Data of Clearwater matches employee contributions to the 401(k) with stock. But it lets workers diversify the stock immediately. By contrast, TECO Energy Inc. of Tampa makes its employees wait until age 55 to divest, then lets them trade only 25 percent per year. Only 19 percent of TECO's 401(k) assets are in company stock. Bank of America Corp., which employs 4,900 people in the bay area, declined to discuss its 401(k). Preventing another Enron won't be as simple as tweaking 401(k) plans. Because of the large role that stock ownership, profit-sharing, stock purchase and traditional pension plans play today, many workers are far more -- or less -- diversified than their 401(k) accounts might suggest. Wal-Mart Stores Inc. gives its stock to workers via an employee stock-ownership plan. "The plan was created to tie all the associates to the company and make them partners in its success," spokesman Tom Williams said. And partners they must stay. Wal-Mart employees cannot move out of the stock until their 10th year at the company. Even then, their only alternative is to move it into an interest-bearing account, William said. But the focus in Washington remains on the 401(k), which has eclipsed the old-fashioned pension and other alternatives as the dominant employee savings plan in America. Even Theodore Benna, president of the 401(k) Association in Jersey Shore, Pa., and the person often credited with devising the 401(k), thinks something must be done. His recommendation: continue to let companies contribute as much of their own stock as they want via 401(k) or stock ownership plans, but stop letting employees add their own. Change won't come easily. Business organizations including the U.S. Chamber of Commerce and the National Association of Manufacturers warn that companies faced with tighter regulation may simply stop matching 401(k) contributions altogether. "Certainly, there may need to be some reform," said Outback general counsel Joseph Kadow, echoing the post-Enron zeitgeist. "I just hope it doesn't go too far and kill the goose." -- Times researcher Kitty Bennett contributed to this report. Scott Barancik can be reached at barancik@sptimes.com or (727) 893-8751.
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