A big bankruptcy raises big concerns
The financial fallout from the Enron debacle continues to mount.
At first, shareholders were hit, as the value of Enron stock plummeted to the point where the stock is now worth more as a collector's item than as a financial security.
Then, creditors found that Enron could not make required payments on loans or for receivables. Company employees watched the value of their 401(k) retirement plans fall through the floor.
Finally, pension plans far outside Enron - teacher's retirement plans, municipal and state funds, for example, that invested in the energy company - lost millions of dollars.
For those concerned how the Enron collapse might affect them, consider this primer:
Enron is not the only major financial failure of the past decade. What makes it different?
For one, it's the largest corporate failure in United States history in dollar terms. But more important, it involves conduct that raises questions of criminal behavior, including shredded legal documents, executives profiting at the expense of other workers, unusual accounting practices, and mysterious business entities carried off the main corporate books.
Still, it is certainly not the only failure in which employees have lost large amounts of savings. The 1990s included a string of bankruptcies and more than a few near misses. In just the past few years, hefty market losses have clobbered employees at such prominent firms as Dell Computer and Lucent Technologies.
What is the main lesson investors should learn from the Enron collapse?
Don't make investment decisions based on an emotional attachment to any company, especially the one you work for.
Enron was considered one of the hot-shot financial entities of the 1990s. As a result, many employees there bought company stock with the money they contributed to their 401(k)s.
Enron workers also received even more shares because they had no alternative. Their "company match" came only in the form of Enron stock.
But in retrospect, the company was built on smoke and mirrors. As the share price tumbled, workers were not allowed to sell the stock - unlike Enron's corporate executives, who could, and did, sell millions of dollars worth of stock. Employees also couldn't sell matched shares until they turned age 50.
Will major government-led reform efforts keep other firms' employees - and investors in those firms - safe from losing their retirement funds?
Some reforms are possible to help protect retirement plans, analysts say, including steps to limit the amount of corporate stock in matching funds, as well as expanded rights for workers to cash in their company's stock.
But larger reform measures involving actions of corporate boards - which led to the Enron failure to begin with - are far from guaranteed. Regulators, lawmakers, and the White House are all talking reform, but don't count on it happening anytime soon, says Sarah Teslik, executive director of the Council of Institutional Investors, a trade group in Washington. "People in power [such as lawmakers, the SEC, etc.], don't actually want it to happen," she says.
One reason: Ex-lawmakers often pop up on corporate boards when they retire. The last thing they want, Ms. Teslik believes, is stiff disclosure regulations for board members.
Do many companies use company stock as a primary component of their 401(k) plans?
Yes. Some 43 percent of the savings in retirement plans maintained by the nation's largest companies are invested in company stock, according to the Profit Sharing/401(k) Council of America. Companies include Proctor & Gamble, Coca-Cola, Sherwin Williams, McDonald's, and Pfizer, to name a few.
How do you prevent your 401(k) from going under if your company suddenly goes bankrupt?
"You have to diversify," says Maria Crawford Scott, editor of the AAII Journal, Chicago. Opt to put your contributions into noncompany stock, such as mutual funds, even if it means giving up the company match. Consider contributing to international funds, bond funds, perhaps a money-market fund, all within your 401(k). And try not to duplicate stocks in the same industry for which you work.
Are 401(k) plans federally inspected and insured?
Yes and no. The plans must meet specified federal guidelines regarding their administration and structure. But they are not monitored by inspectors on a daily basis or protected against market losses. Unlike bank accounts, 401(k)s are not federally insured.
What if I don't understand my employer's plan?
"Get a copy of the summary plan for your program" from your employer, says David Powell, a partner with the Groom Law Group, in Washington. Then see "what rights you have regarding investment and reinvestment of your assets."
My pension plan lost money by investing in Enron stock. Will it be able to get any of that money back?
Possibly. Some pension plans may join class-action lawsuits against Enron. But it is unlikely that there will be much extra cash to distribute, even if your pension plan wins in court, analysts say. The reason is that in bankruptcy proceedings, secured creditors traditionally have first dibs against remaining corporate assets. That means little or nothing will be left over for shareholders.
Still, most investors in pension plans won't really notice the difference. Case in point: The Missouri state employees retirement fund lost some $9 million due to Enron's bankruptcy. But that amounts to only about 0.2 percent of the $5 billion fund.