NCPA - National Center for Policy Analysis

Saving for Retirement, Enron Employees Should Have Diversified

January 18, 2002

Thousands of Enron employees lost most of the value of their 401(k) retirement accounts when the company's stock plunged from $84 a share to practically zero. Now some politicians are calling for new laws to try to safeguard the savings of the 37 million Americans holding 401(k) plans.

But some observers say that -- while not excusing management's misleading, probably fraudulent accounting practices -- Enron's victims bear some of the responsibility for their plight, because many had far too large a proportion of their retirement assets tied up in their own company. Imprudently, they failed to diversify -- and they aren't alone.

  • Knowledgeable investors often limit their exposure to a single company's stock to just 5 percent of their portfolio.
  • But a study released in November by the Employee Benefit Research Institute and the Investment Company Institute found that company stock represents nearly one-third of the total assets in the 401(k) plans of employees of firms that offer their own stock as an investment option.
  • Enron offered a typical 401(k): Employees could invest up to 6 percent of their base pay in a wide range of mutual funds, money-market funds, bonds, and a self-directed Schwab account that could buy almost anything -- including Enron stock.
  • Whatever employees contributed with their own money, the company matched 50 percent (3 percent of base pay) with Enron stock -- essentially free stock, but which couldn't be sold until they reached age 50.

Employees were able to sell at any time assets they had purchased on their own, including Enron stock. But few chose to do so as Enron soared -- thus allowing their portfolios to become dangerously out of balance. For the average employee, Enron's stock represented three-fifths of 401(k) assets.

Many experts contend that such imprudence shouldn't be an excuse for the federal government to rewrite 401(k) rules. All that would do is to reduce investor choice while stepping ever closer toward some kind of federally-mandated retirement system.

Source: James Glassman (American Enterprise Institute), "Diversify, Diversify, Diversify," Wall Street Journal, January 18, 2002.

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