401k Reform Proposals Urge Company Stock Limits, Encourage Advice

By Clifton Linton
Senior Writer, mPower

Scott Wolf, 38, believes the best part of saving for retirement with his 401k plan is the freedom it gives him to select investments. What irks him is that 40 percent of his holdings (the employer's matching contributions) are stuck in company stock.

His plan's rules say he can't sell the stock until he turns 55. He became aware of his perilous position several years ago and complained to his employer that he should be allowed to sell. He was rebuffed. "I don't think the stock is bad; I want to be out of such a heavy allocation," he said. Wolf is an anomaly, a worker who wanted to sell the company stock in his 401k before the bear market and Enron debacle made it fashionable.

He knows many investment professionals recommend not holding more than 5 to 10 percent of a portfolio in a single stock. "When you have 40 percent, they say 'hey, you are in a dangerous position,'" he said.

If only Enron's employees had followed such conventional wisdom with their own investments. Indeed, the reason many of them suffered large retirement plan losses was because their portfolios weren't properly diversified. Not only did they receive their employer match in company stock, but they also invested their own contributions in it. The result was many workers created retirement portfolios top-heavy with this single issue.

Their plight spurred Congress to scrutinize 401k plans and the role of company stock in them. The result has been a flood of legislative proposals from Democrats and Republicans, some largely repeating existing laws and practices. To date, 18 bills have been introduced in either the House of Representatives or Senate, and more could surface.

In early March, Sen. Edward Kennedy, D-Mass., chairman of the Labor and Human Resources Committee, released his private pension reform proposal. This bill was widely anticipated because his committee oversees the Labor Department, which enforces the Employee Retirement Income Security Act (ERISA). ERISA is the law governing employers' fiduciary responsibilities concerning retirement plans.

It's uncertain what legislation may pass or when, but it is possible that Wolf and other employees who think they have too much company stock will get some relief in the next year or two. Following is a rundown of the issues addressed by proposals as of this article's publication.

Company Stock
Company stock is the issue attracting the most attention. The two main concerns are the amount of stock employees hold and the length of time they are required to hold it.

As happens in many 401k plans, Enron made its matching contribution in company stock and required employees to hold the stock until age 55. At that point, they could sell it and buy other investments, or continue to hold the company stock. The employee's own contributions could be used to buy Enron stock, too, but that stock could be sold at any time.

In December 2001, Sens. Barbara Boxer, D-Calif., and Jon Corzine, D-N.J., proposed a bill calling for company stock to comprise 20 percent or less of a 401k participant's account balance and for employees to be able to sell company stock within 90 days of acquisition. Further, their bill proposes to reduce the tax break given to businesses offering company stock as an employer contribution.

Other bills contain a variety of waiting periods to sell company stock. One proposes allowing employees to sell company stock immediately. President Bush, who has come out with his own set of proposals, suggests a three-year waiting period.

Rep. Benjamin Cardin, D-Md. and Rep. Rob Portman, R-Ohio, the primary authors of the retirement laws contained in the 2001 tax bill, propose allowing employees with at least three years of service to sell company stock received as a matching contribution. Other employer contributions of company stock could be sold after five years of service.

Kennedy's bill proposes allowing employers to choose one of three alternatives:

• offer a match in company stock,
• allow employees to buy company stock as a 401k investment option or
• offer both provided a substantive pension plan is also offered.

Frozen Accounts
Transaction suspensions are also attracting attention. In the middle of Enron's meltdown, the company decided to continue with changing its 401k plan provider. Commonly, when this type of change is made employees are locked out of the plan for a period of time for administrative reasons. They can't buy or sell assets or make withdrawals, but contributions continue and are allocated according to employee's wishes stated before the lockdown starts.

Enron's lockdown was announced with 30 days' notice, and company officials did consider postponing it as the company spiraled downward. But they decided to go ahead because, they said afterward, the logistics of changing the schedule were too difficult.

Some proposals recommend making it a legal requirement to give employees from 30 days' to 90 days' notice before a lockdown occurs. Others recommend barring top executives from selling company stock in their executive retirement plans when the 401k plan prohibits lower and mid-level employees from doing so.

Employer reporting requirements are also under review. Current 401k regulations require employers to provide an annual statement. However, many 401k plan providers offer them more frequently (quarterly is common). Many plan participants can access real-time account information from their providers on the Internet.

The proposals before Congress are varied:

• Rep. George Miller, D-Calif., proposes expanding the current reporting requirements so that all participants in any type of defined-contribution plan (including employee stock ownership plans (ESOP), profit-sharing plans, 401ks and 403(b)s) be furnished a benefits statement annually.
• The Bush administration proposes requiring quarterly benefits statements all defined contribution plans.
• Rep. David Bonior, D-Mich., proposes having employers send plan participants a semiannual statement of the company's financial health.

Investment education and advice are encouraged. What Wolf found through his own research, and the Enron situation highlighted, was how ill-prepared many folks are to direct their own retirement planning and investments.

Several bills call for employers to provide information about generally accepted investment principles including explanations about risk management and diversification.

Ted Benna, the creator of the first 401k plan, observed, "the point is, given a 20-30 year time span, virtually any stock will get hammered pretty badly. The problem is, if that hammering takes place when you are in the late stages of your career, you can't talk about it as a paper loss. You will have to change your retirement plans. That's the game people are playing with that kind of concentration in (company stock). They have to hope that the hit doesn't come at the wrong time."

Two proposed bills encourage employers to make investment advice available to plan participants. The proposals would relieve employers of their fiduciary liability for the advice when provided by a registered investment advisor. Rep. John Boehner, R-Ohio, introduced the first bill in June 2001. It would allow plan providers, the financial institutions that provide 401k plans, to offer advice, as long as they disclose the fact that they offer both the investments and the advice.

Sen. Jeff Bingaman, D-N.M., has introduced a companion advice bill in the Senate. It proposes to exclude plan providers from offering advice on their own investments. Kennedy included the Bingaman bill in his proposal.

President Bush has jumped on the advice bandwagon and included Boehner's bill in his recommendations.

mPower, the publisher of this [article], provides independent investment advice to 401k plan participants through plan providers, employers, and the retail market.

More worker input, plan insurance are possibilities. Kennedy's bill requires that workers in plans with more than 100 participants should be represented on retirement plan boards and allows 401k plan workers to vote the shares of company stock held in their accounts.

Finally, the Kennedy bill proposes that the Pension Benefit Guaranty Corporation investigate the possibility of setting up an insurance system for defined-contribution plans, similar to the one that already exists to guarantee the benefits for defined-benefit pension plans.

Passage Prospects
It took years for the most recent revisions to 401k plan rules to be passed, but it may not take so long this time.

"Congress is serious about doing something," said Ken Raskin, an ERISA attorney with White & Case, who represents the Profit Sharing/401k Council of America. He predicted action either "this year or next, if it's going to happen, and that's a big if."

In an election year, Congress often doesn't pass substantive legislation. What might make this year different is that the Enron collapse and its ripple effects have created a strong sense of urgency. Still, if legislation is passed, it may cover just some of the issues outlined here.

The White House is adding to that sense of urgency. In early February, administration officials met with about 80 business leaders to outline their proposals, said a meeting attendee. Stressing that they will work with both Democrats and Republicans, one administration aide called for legislation to reach the president's desk soon.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.