Question about Enron's 401k Program

Vanity

[mjk19]

I have been hearing the stories about how employees of Enron had their 401k retirement wiped out with the collapse of Enron's stock price. I have read almost 2/3s of Enron's 401k were in the company's stock. Were the employees forced to hold Enron stock in their 401k? I have worked for three employers. The first two offered the company's stock as one choice in the retirement plan while the many other choices were different types of well diversified mutual funds. I choose the mutual fund because its important to have a well diversified portfolio to avoid the problem of a Enron collapse. The company I am currently working for offers a choice of mutual funds but the first 1% of the company's matching contribution is in stock of the company the rest is matched to the fund you choose. If Enron's employees were offered a choice of retirement funds and they still decided to stick all their eggs in one basket than I do not have much sympathy for them. Thanks.

[CJ Wolf]

Ah the great 401k scam. Give me part of your paycheck and I'll give you ONE MILLION DOLLARS in 30 years. It's great I'll give you a tax break to do it! Come on now, nothing to lose here. You can manage it but not cash it in, unless you are ready to PAY to use your own money.

[1stMarylandRegiment]

Enron employees had a wide variety of investment options available to them, as is required by section 404c of the Employee Retirement Income Security Act (1974). The opinion enabling self-direction of a Profit Sharing Plan is derived from section 401.k of the Act, thus the shorthand name.

Enron employees 3% matching contribution was made in (apparently) restircted ENE shares, which could not be transferred until the employee reached age 50. (Virtually all of the people I have seen complaining on TV or referred to by Democrats appeared to be over age 50, and could have sold at any time prior to last fall). Therefore an employee who contributed 3% of salary and had 3% matched by the employer could conceivably have had 50% of his 401k in Enron stock involuntarily, but none of his personal money need have been in Enron stock unless he chose to direct the Plan that way.

During three weeks in October the Enron 401k was "blacked-out" while the adminstration service was transferred from one Trust Company to another - a perfectly normal and acceptable practice.

In other words, only participants who violated all the basic investing rules of diversification were "ruined" by the collapse of Enron.

I never allow the value of the company stock in my 401k Plan to rise above 10% of the total value for anuy length of time.

[cinFLA]

Ah the great 401k scam. Give me part of your paycheck and I'll give you ONE MILLION DOLLARS in 30 years. It's great I'll give you a tax break to do it! Come on now, nothing to lose here. You can manage it but not cash it in, unless you are ready to PAY to use your own money.

One cynical dude here.

[mjk19]

Thanks for the serious reply. I have to find out once I start the 401k how to get rid of the company's 1% stock contribution ASAP.

[mjk19]

Also, I was wondering if the managers of Enron pressured employees to choose Enron stock as the 401k option.

[RippleFire]

I have not seen a clear explantion of this by the news media either, but that's not new. The quote below from Time http://www.time.com/time/business/article/0,8599,193520,00.html makes it look like the Enron plan was not restricted to Enron stock, but that at least some portion of the company matching funds were.

Can 401(k)s be protected?

There has been some movement in congress for reform, spurred by the plight of Enron workers who had, on average, 62% of their 401(k) savings tied up in Enron stock. Those savings were largely wiped out because the plan offered little opportunity to diversify. Like many corporate plans, Enron's didn't allow participants to transfer stock that had been given to them as part of a matching contribution until age 50. And Enron officials actively encouraged workers to buy Enron stock. In a memo in August, Lay told employees he'd "never felt better about the prospects of the company. Our growth has never been more certain." Enron workers were further hamstrung by Enron's switching of plan administrators and freezing of all asset shifting within 401(k) accounts for at least 10 days, just as Enron stock was taking its dive. The result was ruin, as Enron sank from $90 to under $1.

Democratic Senators Barbara Boxer of California and Jon Corzine of New Jersey have proposed that plan assets be limited to no more than 20% of any one stock. Their bill would also reduce tax breaks for companies that make matching contributions with stock and would free employees to sell matching stock after 90 days. Senator Bingaman wants to allow companies to offer financial advice without being liable for investment losses, as they currently are.

Says David Certner, chief lobbyist for the American Association for Retired Persons: "In 401(k) plans, we are asking people to take the risk and responsibility for investing, yet we set up this system where we are violating the first basic rule of investing: diversification." Where company stock is a savings option, employees invest almost a third of their assets in it.

[RippleFire]

Thanks for the clear explanation.

[Cousin Eddie]

Per a colleague who's from Houston and has friends who worked there... There were many investment choices in the plan just like most 401k plans. One of the choices was Enron stock. The company advised people to diversify, but when Enron was a highflyer, everyone wanted to get on the bandwagon. Supposedly, based on employee choices, the average employee had 2/3 of their assets in Enron stock. Not smart, but kind of like the dot.com Kool-aid that everyone in Silicon Valley drank. Also, the company's matching portion was given in Enron stock, and that 'matching' stock could not be sold until an employee was 50 years old. This was the only portion of the 401k that was always frozen. Any Enron stock that an employee chose to buy in the 401k in addition to the company match could be sold at any time. Separately, the company hired a new outside firm to administer the 401k (there are companies that specialize in administering retirement plans). While the transition was going on between the administrators, no changes or sales were allowed in any of the investment choices, so in fact 2/3 of the average employee's 401k savings was stuck in Enron stock during the transition, and due to bad luck the transition was going on during the meltdown in October or November.

[KayEyeDoubleDee]

uh, do you, like, know how 401K works?

[mjk19]

Great post. From what I read, Federal Law already restricts the defined benefit pension plan, the old style pension, to hold no more than 10% of the pension plans assets in the company's stock. I am not a big fan of gov't regulation but there should be a similiar restriction for 401k plans too.

[mjk19]

Based on what you posted the Enron employees got what they deserve.

[Fulbright]

The "change in adminstrators" ruse is where the outrage begins...freezing employee options while the stock dropped like a rock.

[trad_anglican]

During three weeks in October the Enron 401k was "blacked-out" while the adminstration service was transferred from one Trust Company to another - a perfectly normal and acceptable practice.

Does this strike anyone else as too big a coincidence? Just at the time that the stock price was tanking, the company, who knew the stock price was going to tank when they went public with the real financial situation, just happened to be switching record keepers at that very moment in time and the employees had no access to their accounts. But the execs all dumped their shares before the blackout?

That's quite a stretch.

[Dog Gone]

Based on what you posted the Enron employees got what they deserve.

I wouldn't be quite that harsh. The way I'd describe it is that they have no one to blame but themselves.

[Dog Gone]

The lockdown, which only covered 10 trading days by the way, had been announced many weeks previously. The lockdown also locked the managers' 401Ks, too.

The selling they were doing was in stock they had outside of these accounts and generally took place much earlier.

It's crazy to think that the managers schemed to have a lockdown during this period. For one thing, it didn't help support the stock price. Is the suggestion that the managers simply hated their employees and wanted to hose them? For what purpose?

Another thing to consider is that the lockdown cost the employees AT MOST a little over $6.00 per share. The employees could have sold at any time during the months when the stock price slipped from $90 to $15 at the start of the lockdown. At the end of the lockdown it was $9.

I hope they were smart enough to sell then, but I doubt it. They'd already let it slide $75.

[CdMGuy]

This wasn't a ruse. I am on the Pension Committee of my employer. 401(k) plans are administered by outside companies. Fidelity Investments is an example of a large 401(k) administrator. Occasionally, an employer decides to transfer to another administrating company. This decision is not taken lightly. Usually, the decision is made several months before the transfer takes place. Employees are advised in advance of the transfer, and also that for up to a 4 week period, they will not be able to access their funds to make any investment changes. They are advised to make any desired changes in advance of the transfer.

We just went through this at my employer on 1/1/01. Everyone understood the rules. Unfortunately, during that period the stock market went down, so participants were unable to move any funds out of the stock mutual funds and into the money market funds. So be it. If the employees had wanted to be 100% protected, the employees could have made that transfer prior to the changeover date.

In summary, this was not a case of Enron doing something bad, but the media would like to have you believe they did this to screw their employees.

[Reelect President Dubya]

ENRON EXPLAINS BASIC FACTS ABOUT ITS 401K SAVINGS PLAN

[Reelect President Dubya]

I have no sympathy for Enron Investors. (anyone want the facts?)

[AZPubbie]

I seriously doubt it. It would be difficult (but admittedly not impossible) for a manager to know how the employee was investing his money in his 401(k) account.