"Retirement Insecurity: 401(k)
Crisis at Enron"
Chairman Joe Lieberman
February 5, 2002
As prepared for delivery
Welcome to today’s hearing of the Senate
Governmental Affairs Committee, "Retirement Insecurity:
401(k) Crisis at Enron," our second on the lessons
learned from the largest bankruptcy in American history.
Though many of us are still coming to grips
with the depth of the damage caused by Enron’s collapse, for
Enron employees and retirees themselves, the consequences were
crystal clear from the day the company crumbled. To put it
plainly, they lost their savings. They watched their nest eggs
evaporate. They lost trust—in both the personal and fiscal
senses of the word—in the system. And millions of other
workers around the country who have been following the sad
stories of Enron’s employees have grown anxious about their
own 401(k) accounts and their own retirement security.
Today’s hearing will ask exactly what
happened to Enron employees’ 401(k)s, and what can and
should be done to safeguard these investment accounts for the
more than 40 million Americans who depend on them for their
retirement.
First, let’s place the Enron 401(k) story
in historical context. Most Americans used to count on
traditional defined-benefit pension plans, in addition to
their Social Security benefits, to support them in retirement.
In those plans, employees’ retirement funds are pooled and
invested by a professional manager, and a fixed monthly
pension is paid out to the employee once he or she retires.
The federal government recognized the central role these plans
played in the lives of Americans and in 1974 enacted major
legislation—called ERISA, the Employee Retirement Income
Security Act—to protect pension investments and safeguard
them from abuse.
In the early 1980s, private retirement plans
underwent a major evolution, as the 401(k) defined
contribution plan was developed. For many workers, it was a
welcome innovation. The 401(k) offers a number of investment
options, including mutual funds and stocks. The money an
employee pays into it ultimately becomes theirs to control.
Also, it’s portable—which is important in our increasingly
mobile economy. And perhaps most attractive of all, the 401(k)
is an investment that can grow over time. Indeed, in the bull
market we experienced for much of the last two decades, it may
have seemed to most Americans that any money put into a 401(k)
was bound to increase dramatically over the course of a
career. Government also encouraged the proliferation of
401(k)s by offering tax deferrals to both employees and
employers.
So it’s no wonder that today 401(k) plans
are very popular—holding 42 million American workers’
retirement money, with total assets of almost $2 trillion. An
account that was originally intended to be a supplemental
source of retirement income has become the very foundation of
millions of Americans’ retirement plans.
Since the passage of ERISA, retirement
security has changed in ways that the law never anticipated.
As retirement savings have migrated to 401(k)s, risks have
shifted from employer to employee. The Enron debacle reveals
how serious those risks can be for typical American workers
when mixed with an un-diversified portfolio and corporate
deceit and mismanagement. It’s time for the law to catch up
with reality and protect our workers’ 401(k) retirement
plans.
When a 401(k) plan is responsibly managed
and its risks and rewards are realistically understood, it is
a terrific tool that empowers American workers to build up
funds for their future. I would urge all American workers, who
have the opportunity, to continue contributing to their 401(k)
plans, but I also urge you to make sure you are not investing
too much in any one company, including your own.
That said, government must address the real
problems that exist with 401(k) plans. In developing a roadmap
for reform, our attention is drawn to two issues in
particular. First is over-concentration. When shares of Enron
were near their highest value just over a year ago, about
two-thirds of total 401(k) plan assets were in the company’s
stock. That’s an average—which means that some employees
had just about all their nest eggs in the company’s basket.
How did that happen? Two big reasons. One,
Enron matched employee contributions with substantial amounts
of its stock and prohibited employees from shifting that
company-contributed stock to a different investment until age
50. Two, the company’s culture actively encouraged
accumulation of Enron stock. Enron’s top management
repeatedly promoted its stock through internal publications
and communications, even when executives must have known the
company was a house of cards. In a meeting on September 26 of
last year, then-CEO Ken Lay was still telling his employees
that the stock’s $27-a-share purchase price was "an
incredible bargain." Lay claimed that "[t]he third
quarter is looking great," and "[w]e will hit our
numbers." Just two weeks later, on October 16, 2001, the
company announced it was taking a $1 billion after-tax charge
to earnings.
Leaving the question of legality aside for
now, it’s just plain wrong for executives to
enthusiastically recommend their company’s stock to workers
when they know workers are taking that as encouragement to
load up on company stock in their 401(k)s. It’s wrong for
management to convey in internal communications that the
company’s stock is on the way up when they have reason to
believe otherwise. That’s not optimism. It’s dangerous
deceit.
The problem of 401(k) over-concentration
should be particularly troubling to us because it’s
widespread. Nationwide, employees of companies without stock
matching programs have an average of about 20 percent of their
401(k) assets in employer stock. And employees of companies
with stock matching programs have an average of about 50
percent of their 401(k) assets in employer stock.
Some people say that if employees are
willing to make risky and un-diversified investments in their
401(k) plan, government can’t stop them. The creator of the
first 401(k) plan, benefits consultant Ted Benna, disagrees.
He says, "We require auto passengers to wear seatbelts
because many won’t wear them voluntarily. We should also
protect employees from financial disaster by prohibiting them
from investing all their retirement savings in a single
stock."
The second major issue we’re going to
focus on is what’s known as the "lock-down"
period. In late October and early November of last year,
because Enron was changing the outside administrator of its
401(k) plan, employees were locked into their 401(k) accounts
for at least two weeks during a volatile period in the company’s
stock price, making them powerless to sell their Enron stock
as it was dropping. That left many of them feeling like their
hands were tied to the deck of a sinking ship, and they were.
The thought of employees sustaining huge
losses while executives were able to sell stock for millions
is infuriating—and especially infuriating because it was
preventable. The risk of a catastrophic loss in the value of a
401(k) account occurring during a lock-down increases
exponentially when employees have most of their assets
invested in a single stock. And when that stock is in the
employer itself—as it was in Enron’s case—the risk of
such a loss occurring, and the risk of other conflicts of
interest arising, is even more problematic.
In other words, the danger of a lock-down is
multiplied many times over when employees’ investments are
not diversified.
In Enron’s case, management knew full well
that their employees’ 401(k)s were overloaded with shares of
Enron. Shouldn’t that have prompted them to postpone the
lock-down when the company was reeling?
Recently, legislative proposals have been
made which address these problems of over-concentration and
lock-downs.
Last week, President Bush put forward a
proposal under which employees investing in 401(k) plans would
get access to professional investment advice; receive
quarterly notices of their pension accounts; be allowed to
sell company stock received through a matching program after
three years; and receive notification at least 30 days before
a lock-down period. His plan would also force senior
executives to hold onto their stock during an employee
lock-down and allow employers to be held responsible for
failing to act in the best interest of their workers during a
lock-down.
While I welcome the President’s plan as a
step forward, I believe it falls far short of what American
workers deserve. By focusing so much on the lock-down and
ignoring the core problem of over-concentration, the President
has over-concentrated on the straw that may have broken the
camel’s back—not on the bales of hay that were weighing it
down in the first place.
Remember, Enron stock had plunged by up to
$75 per share from its high before the lock-down even began.
The 401(k) plans of Enron employees were vulnerable before,
during, and after the lockdown because they were over-invested
in a single stock. The President’s plan touches on
over-concentration, but only by allowing workers to diversify
the stock they have received through employer matches. That’s
a very small piece of the overall problem, so I hope we can
work together to develop a more effective proposal to protect
the retirement security of America’s workers.
Shortly, I will introduce my own plan to
safeguard employee retirement plans. I hope that it will make
a constructive contribution to our bipartisan efforts to offer
employees the protection they deserve.
Improving the security of 401(k)s couldn’t
be a more pressing priority. To many Americans, the
"three-legged stool" of retirement security—made
up of Social Security, private pensions, and personal savings—is
starting to look wobbly. With the stability of Social Security
in long-term jeopardy because of the growing federal deficits
and personal savings rates at just 1.1 percent, we need to get
401(k) reform right.
We have a great group of witnesses today who
can help us do that. I look forward to hearing from our panels—,
from those who experienced Enron’s demise first-hand; from
the Enron managers and others who helped run the 401(k) plan;
and from the policy experts who will suggest ways to protect
other American workers from a similar disaster.
Thank you. Senator Collins? |