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Enron case has policymakers focusing on retirement plans

| Sunday, Dec. 23, 2001

WASHINGTON - When Bill Quinlan retired from Enron Corp. after 30 years at its Florida Gas pipeline subsidiary, he had every confidence in the company and its future.

He had accumulated a retirement account that totaled nearly $1 million in company stock, and he figured company stock was the best place to leave it.

''I've been retired eight years, but I kept invested in the company,'' he said the other day from his home in Corpus Christi, Texas. ''I thought it was just as safe as anyplace.''

Across the country, thousands of workers and retirees at Enron and many other companies look at their employers much the same way. Given company stock as part of their retirement plan, they not only hang on to it but in many cases buy more through their own contributions to the plan.

In some cases, this has paid off handsomely. But in others, such as Enron, it has not. And what has happened at Enron raises important questions for policymakers and for corporations themselves.

Enron stock, once as high as $90 a share, plunged to 63 cents on Friday. The company filed for bankruptcy protection earlier this month, and it is widely believed that when its case is resolved stockholders will get nothing.

Enron, whose downfall has wiped out or sharply reduced the retirement savings of thousands of its employees, is a case study in the perils of the investment accounts that an increasing number of Americans have come to depend upon for income in their old age.

Enron had a number of retirement plans, some inherited from companies it acquired, including a traditional pension that is insured by the government and that is still operating. It covered some Enron employees, including Quinlan, who said he is now getting ''a little over $500'' a month from it.

But Enron also had a 401(k) plan and an employee stock-ownership plan (ESOP), two ''defined contribution'' retirement savings programs to which workers and the company made regular contributions. It is these plans that have received the greatest attention in the wake of Enron's collapse, because it is in them that workers have suffered huge losses.

The losses occurred because workers' and some retirees' accounts were heavily concentrated in Enron stock. ESOPs by their nature, of course, hold company stock, but Enron also fostered concentration in its stock within the 401(k) plan.

The company matched each dollar of employees' contributions with 50 cents in Enron stock, up to a ceiling of 6 percent of pay. It also required employees to leave those matching shares invested in Enron until they reached age 50.

That lock-in was a factor in the losses that Enron workers suffered, for as the stock started downhill, those younger than 50 couldn't sell. But even without it, it appears that those, like Quinlan, who could have fled, didn't.

''Most people have no idea where to invest their money. So they look for some guidance,'' said Shlomo Benartzi, a professor at the University of California at Los Angeles who has studied worker behavior in defined-contribution plans.

''That guidance can be from what the employer is doing. When the employer invests in company stock, what employees do is invest more'' in it, he said.

The Employee Benefit Research Institute, an employer-supported research group in Washington, D.C., finds that at companies where the employer match must be in company stock, company stock also makes up 33 percent of the portion of the account that is the employee's choice. That is ''compared with 22 percent of account balances in plans offering company stock as an investment option but not requiring that employer contributions be invested in company stock,'' according to an EBRI research paper.

Likewise, the Profit Sharing/401(k) Council of America says that among employers that have company stock in their 401(k) plans, including matches and employee purchases, roughly 35 percent of the plans have less than 10 percent of their assets in company stock, 48 percent of the plans have between 10 percent and 50 percent in company stock, and 18 percent of the plans have more than 50 percent in company stock.

''This is a general phenomenon. Workers think of it as implicit advice, endorsement, guidance,'' Benartzi said, adding that it is not limited to company stock.

He said he has done surveys that show that if the employer put the match into international stocks, workers put more of their money into international stocks. If the employer matched with a diversified portfolio of stocks, workers put more into such a portfolio.

The tendency to go with the company is reinforced when the company stock does well, as Enron's did for several years. By one calculation, Enron's 401(k) plan returned a total of 326 percent between Oct. 31, 1997, and Oct. 31, 2000.

''Employees tend to look very carefully at past performance (of employer stock), too carefully,'' Benartzi said. ''Enron did very well in the dot-com era. Employees see company stock doing well and they buy it, but very often this is not a good prediction of what will happen'' in the future, he said.

Benartzi's surveys also show that workers, for reasons he cannot explain, regard company stock as much less risky than other stocks - as not even a stock, really.

The risks posed by this concentration go beyond the retirement account. Since the company is also the source of their income, workers who put their retirement funds in their employer's stock are putting all their financial eggs in one basket. If the company gets into trouble, they could end up losing both their paychecks and their savings.

Others, however, point out that concentration can be beneficial. There are many companies whose stock outperformed the market, sometimes by a wide margin, and workers who invested in it and then diversified in retirement did very well indeed.

Concentration ''is a long-running issue that only raises its head in bad times,'' said Karen Field of the Washington office of KPMG, the big accounting firm.

''What you need to think about is, those people (investing in top-performing employer stocks) have done wonderfully well ... , and if you told employees 'You can't participate in that,' they are not going to be real thrilled,'' Field said.

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