Enron Collapse A Warning Sign for 401(k) Funds

The sad tale of the Fortune 500’s seventh largest company from revenues of $100 billion in 2000 to bankruptcy in 2002, sends a clear and alarming signal to investors the world over, have a well-planned, diversified retirement portfolio or you are risking your future.

Enron, which had $60 billion of stock market valuation, watched its stock value evaporate after it was discovered that questionable partnerships in which Enron had been heavily involved were kept off the company’s accounting books.  The result of these omissions was the drastic reduction of Enron’s real debt level and an overstatement of its profits.  Wall Street, regulators, investors and employees were misled.

The tragedies of this tale were the financial consequences to Enron’s employees.  While the Enron executives were apparently selling billions of dollars worth of stock at high values before the collapse, employees were required to hold a minimum amount of Enron stock in their portfolios, and a large number of 401(k) plans were heavily weighted with Enron shares.  Enron stock comprised 60 percent of the overall value of the firm’s 401(k) fund.  To make matters worse for the employees, Enron switched 401(k) plan administrators, restricting employees from cashing in their shares when the stock value started its freefall.  Employees could only watch as their retirement plans that were so closely tied to the value of the Enron stock disappear as the stock eventually dropped to 26 cents per share.  A U.S. Labor Department statement points out that many employees lost 70 to 90 percent of their retirement assets.

Lawmakers are introducing new legislation that would limit how much of a company’s stock its employees can hold in their 401(k) plans.  How this legislation will eventually read is still unsure.  One concern is incentive plans.  Many companies offer their employees matching contributions to employee’s retirement plan contributions.  For many firms that match comes in the form of company stock.

A recent survey of 1.5 million 401(k) plans by Lincolnshire based Hewitt Associates, estimates that one third of all assets are currently invested in company stock.  Regardless of the final form of new legislation, one lesson clearly learned from the Enron story is the need for a well-planned, diversified retirement portfolio.  Relying on one stock to represent the lion’s share of a 401(k) plan is risky.  If your 401(k) plan is over weighted by one stock, you should reexamine your plan.  No matter how well your company stock is doing now, things can change.  As a business owner, you must recognize that your employees will be more hesitant about holding large blocks of company stock and adjust accordingly.