Retirement Insights -- Retirement Security: Lessons from Enron
By Karen Gilgoff
Enron. Just mention the name of the once-idolized energy company and nearly everybody gets the picture: unethical practices, greedy executives, betrayed employees. Formerly the nation’s seventh-largest corporation, it’s now the biggest case of corporate bankruptcy in American history.
One of the most publicized aspects of the scandal has been Enron’s employee-pension plan. It’s not a traditional defined benefit (DB) plan but a 401(k) — a defined contribution (DC) arrangement in which every employee has an investment account. Enron’s contributions were in company stock, and employees were encouraged to put their own contributions there as well.
As a result, it accounted for almost 60 percent of plan assets when the company began to falter. Share prices plunged from $90 to 28 cents in a little over a year. Desperate employees couldn’t sell because plan rules barred stock sales by employees under 50. Even worse, the company "locked down" the plan in order to make administrative changes, which meant that nobody could sell in the months before bankruptcy.
Meanwhile, executives with cushy, non-pension stock options were making multi-millions by exercising them. From October 1998 to November 2001, 12 Enron executives and directors each sold $30 million-plus in company stock.
Suffering spreads
As they were selling, a lot of big public pension plans were buying. Unaware that Enron was headed for bankruptcy, they took advice from investment consultants, who assured them the stock was sound. Florida’s state pension fund suffered most, losing over $300 million. Washington, New York, Ohio and other states also incurred big losses.
Laurie Hacking, director of Ohio’s Public Employees Retirement System (PERS), said that although it hurt to lose $68 billion on Enron, the loss only amounted to "one tenth of one percent of our portfolio." That’s because PERS and other public DB plans are guided by state statutes, which require broad diversification of plan holdings.
Private sector DB plans have similar rules under the federal ERISA law. To prevent disasters like Enron, ERISA permits no more than 10 percent of a DB plan’s value to be in company stock.
Many lawmakers, labor unions and citizens’ groups would like to see stronger regulation of DC plans, too. In AFSCME’s view, one area to be addressed is plan governance. In testimony submitted to the House Education and Workforce Committee, our union said that employees should be empowered "as a counterweight to the conflicts of interest involved in employer control of these plans." That means making sure pension plans — DB and DC, public and private — are governed by strong boards, with retirees and workers as active trustees.
Pyramid approach
"Some governors and state legislatures would like to convert their DB plans to DC plans," AFSCME said, emphasizing that, if they succeed, public employees will be trading guaranteed benefits for the volatility of capital markets. "The labor movement feels very strongly that retirement security is best financed by a three-layered pyramid" — with Social Security (and its government guarantee) at the base; in the middle, a DB plan that gives workers vested rights to benefits; at the top, personal savings, especially in the form of tax-favored 401(k), 457 and 403(b) plans.
When workers have Social Security and a defined-benefit pension plan or a strong public pension that serves both purposes, they can afford the risks of a defined-contribution supplement, AFSCME concluded.
In fact, one positive result of the Enron debacle is that all the bad press on the risks of DC plans may save Social Security from privatization. Enron, coupled with big declines in the stock market, is making folks think twice about putting more of our retirement eggs in the investment-accounts basket.
