Insiders Don't See Legislation as Answer to Enron's Problems

November 28, 2001 (PLANSPONSOR.com) - With Enron Corp.'s troubles multiplying by the day, industry insiders say that the solution to the problem of company stock is not necessarily governmental intervention - rather, it is education.
By PS

At issue is the fact that many Enron employees have seen their retirement funds dry up as Enron’s stock plunged in recent months. Many plan participants held large chunks of Enron stock in their plans. After Dynegy Wednesday pulled out of an intended takeover of Enron, it now looks increasingly likely that Enron will declare bankruptcy, wiping out participant accounts and making succesful class-action suits less likely.

James Delaplane, vice president of retirement policy at the American Benefits Council (ABC), said governmental intervention might not be the best method to prevent these kind of debacles. “I would be skeptical of intervention because it would cause a shift in the traditional model of defined contribution plans,” he said. “Company stock options programs have worked in many cases where in others it hasn’t.”

In-House Measures

While Delaplane said there are clear examples that company stock programs work, he believes the challenge employers face is one they can tackle through in-house measures.

“I think it’s mostly an educational challenge than a crying need for governmental action,” said Delaplane. “Most employers do a good job of saying that company stock is a viable and worthwhile investment but it makes sense to be diversified. They also do a good job of providing educational tools to help their employees make prudent investment decisions. But there are clearly some policy changes that would make it even easier to get workers the education and advice they need. The Boehner (advice) bill is one example.”

He added that last year, when the Portman-Cardin bill was making its rounds on Capitol Hill, it included a provision allowing employees to buy or save for financial planning services using pretax dollars much like a flexible spending account. But this was later dropped from the agenda.

Legislation Far Off

David Wray, president of the Profit-Sharing Council of America (PSCA), also says legislative change is far off.

“It’s very hard to change things in Washington unless you have a preponderance of support. The people who support the current system feel very strongly about it. Most likely, companies will limit exposure to company stock themselves,” he says.

However, Eli Gottesdiener, the lawyer representing the plaintiffs of one of the suits against Enron, says legislation is needed to protect participants from themselves. He noted that Enron’s participants were given incentives not to diversify their portfolios. For example, participants under 50-years were not allowed to sell stock that was matched by the company. Those over 50 had liberty to sell but were encouraged to keep their Enron shares.

He continued that 62% of Enron’s 401(k) plan was invested in company stock and the average participant balance was $50,000. Since the release of its earnings, the company’s stock has plunged more than 70%.

Mandatory Diversification

“Defined contribution plans have supplanted defined benefit plans as the backbone of many people’s retirement plans – it’s high time for Congress to step in and put into ERISA the requirement that 401k plans have mandatory diversification rules,” Gottesdiener said.

Gottesdiener said a step in the right direction would be to resurrect the defeated Boxer Bill. The 1997 bill proposed that 401(k) plans adhere to the same diversification rules of defined benefit plans by imposing a 10% cap on the amount of company stock employees could invest in ESOPs.

“Congress saw the sense it made to combat issues such as self dealing in defined benefit plans

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