Harsh Lesson From Enron
Harsh Lesson From Enron
EILEEN ALT POWELL
Jan. 16, 2002
NEW YORK (AP) _ In testimony before a Senate committee earlier this month, Enron retirees told devastating stories about the fate of their retirement accounts.
Janice Farmer, 64, of Orlando, Fla., said she retired from the energy trading company a year ago with nearly $700,000 in Enron stock.
``I was proud to invest in Enron,'' she said. ``The company encouraged me and others to do so, saying that employee ownership would help prevent any possible hostile corporate takeovers.''
After Enron's collapse amid accounting irregularities, Ms. Farmer's nest egg was cashed out for $20,418, she said.
Another former Enron worker, Charles Prestwood, 63, of Conroe, Texas, said he watched helplessly as his retirement account fell from a value of $1.3 million to near zero.
``I lost everything I had,'' he told the committee. ``I hope and pray that it can be recovered.''
Steve Berman, a Seattle lawyer, has filed a lawsuit in federal court trying to recover some money for Farmer, Prestwood and hundreds of other Enron workers, believing ``there are assets out there'' that can be tapped.
It could take years for that suit and others to make their way through the court system, and it remains unclear how much _ if anything _ Enron workers and retirees will get back. Enron stock, valued at nearly $90 a share in the fall of 2000, now trades on the over-the-counter market for 28 cents.
Experts say employees of other companies who save through corporate profit-sharing plans, 401(k) accounts and other retirement programs should look at Enron as a ``wake-up call'' to review their own situations.
Planners have repeatedly urged investors to ``diversify, diversify, diversify.'' To most people, that has translated to a mix of stocks and bonds or to mutual funds that invest in different sectors such as large companies or small companies or emerging markets.
Savers certainly aren't diversified if they're totally or almost totally invested in a single stock, especially if it's the stock of the company they work for.
``Company stock can be a very good investment _ to a point,'' said J. Michael Scarborough, president and chief executive of the Scarborough Group Inc. of Annapolis, Md., which helps individuals manage 401(k) accounts.
Few experts are willing to ban the common practice of a company using its own stock to match a worker's 401(k) contribution, or to put a legal limit on how much corporate stock can be held in employee retirement accounts. After all, over the years many workers have invested heavily in their own companies and done extremely well.
But Scarborough would advise workers to try to limit a single stock issue to no more than 15 percent of a retirement portfolio. He acknowledges it's hard to do that in some cases, because companies including Enron often have time or age limits on when employees can sell their holdings.
``Companies will say, 'We want workers to hold the stock because it builds loyalty,''' Scarborough said. ``My answer would be, that's what a paycheck is for.''
His advice to workers who find they can't reduce their corporate stock holdings: ``Scream bloody murder and get the company to change plan provisions.''
Scarborough and other experts also believe federal rules and laws governing retirement accounts should be changed so workers can get professional help with their investment decisions.
Federal law currently prohibits most companies from giving advice on 401(k) plans for fear of conflict of interest. A recent Labor Department ruling appears to be opening the door a bit, allowing an investment company that runs retirement programs to hire an independent financial adviser to manage accounts for individuals.
``This is not just about Enron,'' said Ward Armstrong, president of American Express Retirement Services in Minneapolis. ``Enron is a beacon for change.''
He believes the debate should focus on how to educate workers.
``There will be some advocating limits on specific investments or some other sort of controls _ in effect to try to protect people from themselves,'' Armstrong said. ``We think that what really benefits participants will be a way to give them specific advice _ individual to them _ that takes into consideration their entire financial situation.''
Armstrong warned, too, ``We should think carefully about trashing company stock as an investment option.'' That could discourage some companies from matching employee contributions, he said, or from sponsoring generous plans.
``We don't want to do anything that would discourage retirement savings,'' he said.
On the Net:
Scarborough Group: www.401kadvice.com