Originally created 02/10/02

Stick with your 401(k) despite Enron's failure



The Enron 401(k) scandal caused many of their employees to lose a big portion of their retirement savings. It will probably cause millions of other Americans to lose opportunities in their own retirement savings, particularly in their Social Security savings.

Some politicians in Washington are using the Enron 401(k) scandal to attract support for limiting investment choices offered in retirement plans when, in fact, they should be increasing those choices.

The possible proposed legislation to allow the option of investing a portion of Social Security contributions in corporate America is probably dead now also.

If politicians really want to help, they should start with their own "no-choice" Social Security retirement plan. You remember, the one that is supposed to run out of money for retirees when the baby boomers retire?

Don't get me wrong. I am saddened by the loss Enron employees took in their retirement plan from investing in Enron stock. If employees were prevented from selling while management was dumping shares, the guilty should be punished.

However, the Enron mess and the posturing of politicians will, I'm afraid, discourage employees from fully using 401(k) and similar retirement plans, which are some of the greatest financial benefits ever offered to American workers.

401(k) plans were introduced to give us a tax-favorable chance at accumulating retirement savings of our own, rather than being fully dependent on Social Security benefits.

Since the Enron scandal broke, more of our clients have requested advice regarding their 401(k) asset allocations. The headlines are causing concern, even for employees who have no employer stock investments.

Their concern is warranted. The lesson of Enron's retirement plan mess is simple: Diversify your 40l(k) assets, particularly when it comes to investing in employer stock. But to do that effectively, employees need the right choices. Right now, many retirement plans don't offer enough choices.

Paul Merriman at CBS MarketWatch.com makes my case eloquently. He says, "Many employers structure their 401(k)s based on what the fund companies tell them are their most popular products - and the most popular funds aren't always the best funds."

In my experience, 401(k) plans usually offer only what has worked well recently. Employees put most of their money in large-cap funds, particularly the S&P 500 index or large-cap growth stock funds, because those are popular and worked well until two years ago. The opportunities to invest in other stock and bond sectors are frequently nonexistent, even though some of those choices have better track records over longer periods.

Alternative choices are important to enable employees to structure an asset allocation using all types of investments that can help an employee achieve more consistent growth.

At a minimum, 401(k) plans should offer mutual fund choices in the following styles and asset classes: money market and bond funds (including Treasury, corporate and high-yield); balanced funds; stock funds that include index, growth and value styles in large-, mid- and small-cap stocks; realty funds; and international funds.

So if you are a participant in a 401(k) or similar retirement plan that does not offer those choices, make the Enron scandal work in your favor.

Petition your employer to expand the mutual fund choices offered in your 401(k).

If your employer requires you to maintain any investments in company stock, challenge them to give you a good rationale for the policy.

If you have more than 10-15 percent of your retirement plan invested in employer stock (the maximum amount recommended by most financial planners), consider the risk you are taking.

Ask your employer to offer the services of a financial adviser to help employees select a proper asset allocation to fit their age and risk tolerance.

Too much invested in employer stock is a significant risk. Your paycheck already depends on the prosperity of the company you work for. Unless you are a majority or principal owner, don't bet your paycheck and your retirement on your company.

Social Security gives you no choices. Your contributions and your employers' contributions go into the Social Security trust fund.

The Enron 401(k) scandal hurt a lot of their employees. Unfortunately, it will continue to hurt many others who will be stuck with the "no-choice"' Social Security and possibly more limitations in their 401(k) plans.

(Frank Jones, former director of the Eighth District Federal Reserve Bank, is a Memphis business executive and investment adviser. Send E-mail to summit15@aol.com.)