Diversify, whatever you do. That’s the quick lesson from Enron’s collapse. Company employees, whose 401K relied entirely upon the success of Enron earnings, lost everything when the stock suddenly crashed last fall. More than $1 billion disappeared from the company’s 401K.
“This is going to open people’s eyes to the risk of holding so much company stock,” said Peter Mork, an associate at La Jolla Economics, a private economic consulting firm. Monk remains dubious, however, that companies will voluntarily amend their 401K plans. It’s up to employees to be aware of how their nest eggs are used, he said.
A 401K account safeguards an employee against the future. The retirement account deducts money automatically from the payroll, and tucks it away into a plan that offers, among other things, investment in company stock. There is no national or state law limiting the amount invested in company stock, and some loyal employees tip their portfolios heavily in favor of their company.
The Enron tragedy is a call to employees to re-think their retirement plans, says Monk.
For those who are not seasoned investors, which are the majority of public-company employees, step one is to diversify, said Mork. Don’t put too much stock in anyone company, even your own.
“My 401K is entirely invested in Intel,” said Patrick Finucane, a former Intel employee, who left the company in November. “Not that there’s anything wrong with Intel, but if a surprise happens like it did to Enron, there goes my whole 401K.”
Finucane said that while he worked at Intel,
>he was offered a choice of diversifying through other stocks and mutual
>funds, or putting all his stock in Intel, which he did. No one dissuaded
>him from doing so.
>The 401K at Cisco Systems does not include an option of company stock,
>said Kathleen Deornelas, in the Human Resource Department. It's too
>tempting for people to fold the bulk of their savings back into the
>company, in the hopes of a quick return, she said, especially with a
>top-performing company like Cisco. Her company 401K offers investment in
>mutual funds and other stocks instead. "We don't want people to put their
>eggs in one basket, " she said.
>That adage may soon be backed by federal law.
>A new bill, if passed by Congress, will help protect employees from the
>Enron fate. Proposed by California Senator Barbara Boxer (D), the Pension
>Protection and Diversification Act, would limit the amount of company
>stock that can be allowed into an employee's retirement plan. It amends
>the Employee Retirement Income Security Act (ERISA) of 1974, by placing a
>limit of 20% that any employee can invest in one stock. Currently, the
>ERISA has no limits on the amount of company stock invested in a 401K.
>The bill is a direct response to the Enron scandal, said a representative
>from Boxer's Los Angeles office, and is now in committee.
>Employees like Cynthia McCane of Hewlett Packard say they would welcome
>protection from a volatile stock market. Her colleagues at Hewlett
>Packard aren't particularly worried about their 401K, she says, but they
>are concerned about Wall Street's future, and have been since September 11th.
>"It's nerve racking to play the stock market," she said of the recent drop
>in stock prices. "You win you lose, depending on where your money is
>going." And, how your 401K is invested.