When Enron's stock plunged from more than $30 to mere pennies per share last fall, a lot more than money was lost. Along with nearly all the equity invested in one of America's most heavily capitalized corporations went the unquestioned confidence many people had in the integrity of their own retirement savings.
All told, 11,000 Enron employees lost close to $1 billion in 401(k) savings. Worse, at a time when top Enron executives were unloading their own shares -- profiting by tens of millions of dollars -- these same executives were encouraging employees to continue investing in the company, even as interoffice memos expressed warnings that accounting irregularities were about to bring the company down. Now, amid recriminations, shredding documents, and congressional hearings, many workers across the country are wondering if their own retirement savings are at risk.
Should you panic? Probably not. Your 401(k) is one of the best investment opportunities available. The money you contribute to your 401(k) (or similarly, 403(b) account) is not subject to state or federal tax until you withdraw it, perhaps decades from now. This provides years of tax-free growth that can make even a modest annual contribution grow to impressive levels by the time you retire. As a bonus, if your employer offers to match part of your contributions, you'll enjoy an instant, automatic return on your investment that is nearly impossible to duplicate elsewhere.
The problem Enron employees faced was twofold: First, the company was in serious financial trouble, even while it attempted to maintain the appearance of financial propriety. Second, its corporate culture encouraged employees to invest heavily in the company, both in an employee stock ownership plan (ESOP), and its now-infamous 401(k) plan. Enron offered employees a 50% match of their 401(k) contributions, but that grant came completely in company stock, which eventually proved to be worthless. When the company collapsed, many workers saw years of savings evaporate.
There are valid arguments in favor of offering employees a share in the success of the company they work for. But too much of this good thing can be dangerous if events conspire against you. In the wake of the Enron debacle, this is a good time to take a hard look at your 401(k) to make sure that the money you invest today will be waiting for you when you retire.
Some suggestions:
• Check to see how your assets are distributed. While 401(k)s are excellent vehicles for investing in the stock market for the long-term, if too great a percentage of your assets are in company stock, those savings could be at risk if your company suffers a major reversal. (We like to steer people towards the index fund option if their plan offers it.) Depending on your situation, 10% or 20% is a reasonable maximum to hold in any one stock, especially if you do not have significant assets outside your 401(k). Be especially careful if you invest additional funds in your company outside of your 401(k), through options grants, an employee stock purchase program, or outright purchase. Check, too, to see if your mutual funds heavily invest in your company, or in your company's industry, where a downturn could have a dramatic effect on your savings. Remember, if your job is at risk as well as your savings, you could be setting yourself up for real trouble if things go badly.
• Study your company's financial statements as closely as you would those of any company in which you are considering investing. While company employees have the advantage of knowing details of their firm's inside operations, hidden problems can surprise even high-level executives, as apparently was true in Enron's case. Examine your company's annual reports and quarterly SEC filings to learn about the challenges that face it, and realistically assess its prospects for profit and growth. Doing such research will pay off in several ways -- besides making you a more careful manager of your own money, your familiarity with your company's operations will likely make you a more savvy employee as well.
• Check with your 401(k) administrator to learn the rules that govern your ability to control the assets in your account. You don't want to be caught in the same trap as the Enron employees who were barred from selling their company shares if they were less than 50 years of age, even while the stock plummeted. Such restrictions might not be a problem if your company is on sound financial ground. But knowing the obstacles you face in a crisis -- or when you're ready to access your account in retirement -- can help you manage the factors that are in your control.
• Seek independent advice. When it comes to making sure your retirement assets are deployed safely and effectively, it makes sense to talk to a knowledgeable and detached professional who won't be swayed by the interests and enthusiasm of your employer. A fee-only financial advisor, such as those who are on call on the Financial Helpline available to TMF Money Advisor members, can give you an unbiased opinion about the allocation of the assets you've accumulated for your retirement.
If there is a silver lining to the Enron mess, it is that it is likely to spark regulatory changes that will give 401(k) investors more flexibility in managing their accounts. For example, a recent Bush administration proposal would allow all workers to sell shares of company stock after holding them for three years -- a rule that could have saved alert Enron workers millions of dollars. Other proposals would limit the amount of company stock one could hold in 401(k) plans, or limit company restrictions on selling company stock in 401(k)s. Until such changes are enacted, knowledge is your best defense.
Jerry Thomas, thank God, does not own shares of Enron Corporation. The Motley Fool has a really, really nifty disclosure policy.
