By Ellen Hoffman
Here's a mixed message for you: On Jan. 1, new laws went into effect that increase the amounts of money millions of Americans can contribute to their 401(k) and other retirement accounts (see BW Online, 1/3/02, "New Rules for Nurturing Your Nest Egg"). But the scary news about 401(k) plans these days is how Enron's sudden downfall and stock-price collapse has virtually wiped out the retirement savings of thousands of employees, who were heavily vested in the company's stock performance.
If you're contributing to a 401(k) plan, the Enron debacle should serve as a wake-up call. While this isn't the first time that the vulnerabilities of the 401(k) have come to the fore, you can never be too prepared when it comes to protecting your retirement savings.
Only last summer, numerous stories circulated about Lucent employees whose retirement funds took a beating when the company's stock plunged. And when Ford Motor announced thousands of layoffs this month, it also said that it was temporarily suspending the employer match to 401(k) accounts. Ford spokesperson Anne Marie Gattari says the match was also suspended during a business slump in 1991. Ford didn't resume its pre-slump match until 1994.
WHOSE BEST INTEREST?
The collapse of tech stocks and the general market malaise of the last two years is another example. According to Cerulli Associates, a Boston research and consulting firm, for the first time in 401(k) history, participants opened their yearend statements to find that they had lost money in 2000. The average account declined, from $46,740 to $41,919, over the course of the year.
Cerulli spokesman Peter Starr points out that the figures don't really tell the whole story because they don't factor in any contributions participants made during the year. So, if an employee had contributed $5,000 to that "average" account in 2000, his total loss really would be $9,821, instead of $4,821.
For the millions of Americans who are relying on 401(k) plans to fund their retirement, here are some things you should know: Under federal law, "there is an overarching [federal] directive to plan sponsors: Administer the plan in the best interest of the employees," explains David Wray, president of the Profit-Sharing Council of America, an organization of 401(k) sponsors. But here's the rub: "best interest" can be an elusive concept.
NEW LAWS COMING?
As the Enron case shows, no limit exists on the amount of the employer's stock that can be held in a retirement account or on the length of a "lockout" period -- the time when employees are prohibited from conducting transactions in their accounts. Senators Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.) have now introduced a bill that would limit an employee's investment in the employer's stock to 20% of an account and would cap the lockout period at 90 days. A number of congressional committees and a task force made up of the Secretaries of Labor, Commerce, and Treasury are also studying the Enron case's implications for federal retirement laws.
Because it's unclear what -- if any -- action Congress will taken after the Enron hearings run their course, it's crucial that you protect your own account now. Review the basics of 401(k) management, become familiar with the specifics of your own company's plan, and adjust your contributions and your overall planning accordingly.
Remember that although each 401(k) plan must meet certain federal standards and file financial reports with Washington, your employer sets many of the plan rules -- including how much money you can put in, whether your contributions are matched, your investment options, and loan and withdrawal options. If you don't already have one, get a copy of the Summary Plan Document (which you should have received when you started your job) from the plan administrator, read it, and ask for clarification of any rules that you don't understand. A U.S. Labor Dept. publication, "What You Should Know About Your Pension Rights," can help you evaluate your employer's policies and practices.
You need to become familiar with your company's other retirement benefits and how they're funded and invested, as well. You may not own any company stock outright and feel safe from an Enron-type collapse, but what if your employer's profit-sharing and pension plans are heavily dependent on the company's own stock? You should find out. Diversifying your portfolio -- that is, investing it in several different retirement funds -- is the safer way to go.
If you have any doubts about whether your plan is being managed in the best interest of employees, request help right away from the Division of Technical Assistance at Labor's Pension & Welfare Benefits Administration. The telephone number is 202 219-8776. The division will help you obtain any benefits you think you're entitled to, as well as figure out if the plan is complying with the law.
Review all of your potential retirement assets -- within and outside your 401(k) -- as well as your options. If you're too heavily invested in company stock (experts suggest that you limit the amount to about 10% or 15% of the total value), it's time to diversify. If you think you're too heavily invested in stock, you might think about reallocating a percentage of your money to a different type of investment vehicle, such as bonds or a money-market account.
You might also want to consider increasing the amount of money you're saving that isn't tied to your employer or your 401(k) plan. If you choose a Roth IRA, for example, you won't get the tax benefit now, but you'd have sole discretion over how that money is invested.
Learn from the Enron case: If you depend too heavily on one company for your retirement -- through 401(k)s, the company's profit-sharing and pension plans, or your own non-401(k) investments in its stock -- you may have little or no control over your financial security and future. It's time to take a hard look at where you stand.
Hoffman writes Your Retirement twice a month, only for BusinessWeek Online
Edited by Patricia O'Connell