Retirement risk/A second lesson from Enron

Author: Editorial

Published: January 5, 2004

When Enron and WorldCom imploded under the weight of accounting scandals in 2001, Congress responded with tough new rules designed to reassure investors that their money is safe in corporate America. But thousands of employees lost their retirement funds in those collapses too, and it's high time that Congress updated the rules that govern modern retirement plans so that workers can have similar peace of mind.

Just a generation ago most Americans relied on conventional pension plans for much of their retirement income, and they could usually assume that professional pension managers followed federal rules governing prudent diversification and risk.

But today 401(k)s and other risk-bearing accounts in which you manage your own money have surpassed pension plans as the single biggest source of retirement assets. Federal regulations have not kept up.

Most Americans with 401(k)s or similar retirement plans have access to a family of mutual funds such as Fidelity or Vanguard, and their portfolios, even if modest, are diversified. But a significant share of workers, through company incentives or their own poor judgment, have overloaded on the stock of their own employers.

One recent survey of 401(k)s that allow the purchase of company stock found that 45 percent of participants had more than 20 percent of their portfolio in their employer's stock, and about 14 percent had 90 to 100 percent tied up with their employer. That's simply too much: If their employers followed Enron into bankruptcy, they would stand to lose their retirement funds as well as their jobs.

This doesn't mean that the government should mandate a worker's investment choices. But current regulations leave many Americans with little information about prudent diversification principles, and they let employers encourage, or even coerce, their employees into buying company stock for their retirement portfolios.

In a recent essay published by the Urban Institute and the Brookings Institution, former Treasury Department tax counsel Mark Iwry says Congress should set a ceiling for the amount of company stock held in an employee's retirement plan, require that every employer offer a standard diversified portfolio as a retirement default option and reduce various federal incentives that have led some firms to load up their employees' retirement funds with company stock.

Capitalism has made millions of Americans rich in the last two decades, but it has also exposed millions to substantial new retirement risks. The government plays an important role in regulating that risk, and Congress should acknowledge that role before another Enron scandal provides an unpleasant reminder.