Retirement Plans

Protecting 401(k) and Preventing Future Enrons

If we can take anything away from the debacle that Enron was, it will be the lessons we can garner from its deception and how they can be applied to prevent future Enrons from emerging from the dung pile. Enron was definitely a wake-up call. It wasn’t good for the market, and it definitely wasn’t good for the thousands of 401(k) plans it purported to back, especially when those plans included a substantial portion of company stock options. As chronicled in the documentary “Enron: The Smartest Guys in the Room,” top executives were made filthy rich while investors and employees were left with nothing. The scandal that was Enron still continues to have market reverberations and ramifications even seven years after the fact. Under the IRS’s definition, a 401(k) plan is a type of defined contribution plan. Contributions are made to this kind of retirement plan through salary reduction. Employees agree to have a certain percentage of their salary garnered to add to the pot of this plan. The plan also details how much the employer is willing to match if any, and this amount of matching is not profit dependent. As a result, these contributions reduce salaries which then reduce income tax owed. They are invested and any earnings are tax-deferred until which time the employee opts to withdraw the money for retirement. 401(k) plans are not defined benefit plans. The ultimate amount that an employee will receive when they are ready to draw on the account for retirement is not defined. Because 401(k) plans have investment components to them, if the shares that are part of the plan are doing well then more money will be available for use later. On the flip side, if investments are doing poorly, then less money will be garnered in the long run. To fully understand Enron’s impact on individual 401(k) planning, we need to be aware of the so-called benefits that Enron put in place for its 401(k). Enron matched employee contributions up to a limit with company stock, and then it prohibited employees from being able to sell any stock until they reached the age of 50. This essentially hogtied employees when bankruptcy was declared. Former longtime Enron employees like Roger Boyce, 67, whose $2 million accrual over 30 years is nearly gone. Stock prices plummeted when Enron went bankrupt, and because of the age restriction on selling, employees were forced to stand by and powerlessly watch their stock quickly lose value. In the wake of this fiduciary disaster, lawmakers have made efforts to introduce bills that protect retirement futures. For example, Senators Barbara Boxer (D-CA) and John S. Corzine (D-NJ) have introduced a bill that limits to 20 percent the amount of stock a company is allowed to match employee contributions in a worker’s 401(k) plan.

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