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Sunday, Jul 12, 2009
I agree with all of the major points that Damien Cave makes in this article, but there is one false statement that I think should be corrected. Defined benefit pension plans are not plans that "pay out what you put into them." In other words, the benefits are not defined by the contributions.
Rather, the benefits are calculated by a formula based on salary (typically the average of the final three or five years) and years of service. Workers and employers contribute funds that are invested by professionals in order to earn the returns to pay the benefits. Many of these plans include early retirement incentives, so employees gradually earn a small benefit, and then at a magic age they start earning big benefits. Workers who leave the company before serving 20 years typically earn an insignificant benefit or none at all, despite their contributions (unlike defined contribution plans, where the benefit is defined by how much you contribute, how much the company contributes and the earnings).
One big reason companies have abandoned DB plans is they aren't valuable to employees who plan to leave in a few years. Also, increasingly burdensome rules make them more expensive to operate. In contrast, DC plans are relatively easy and cheap to maintain. Also, workers appreciate 401Ks much more because they can see how much is there and they can take it with them when they job hop.
Another common fallacy is that from 1945 to 1980 all companies offered and funded generous pensions, and these were subsequently abandoned in recent years in favor of DC plans. The reality is that many of the largest companies offered pension plans to reward worker loyalty, but the benefits they paid were often very small, little more than gratuities. Medium-sized and small companies often offered no retirement benefit. Before ERISA was passed, companies could disqualify workers from pension benefits for the slightest reasons, such as a four-week separation in service due to illness or injury in a 25-year career. In other words, the benefits weren't that great and the plans didn't cover the majority of workers.
-- Craig Gunsauley
It is entirely predictable. Enron goes bust, a bunch of employees get screwed and the knee-jerk response is "legislation to protect workers from themselves coupled with campaign-finance reform."
1) As is now well-established, the Bush administration did not heed campaign-contributor Enron's appeals for special consideration. ("Then it's a scandal if they didn't help," says Waxman!)
2) Instead of new laws limiting employees' options, restrict the companies' abilities to control employees' investing decisions.
This scandal will likely create a smarter class of 401K investors. There is little the government needs to do after the executives and auditors have been brought to justice.
-- William Moser
I've seen quite a bit of pap written in the wake of Enron's collapse, and while I'll admit that Damien Cave's article is not one of the more egregious offenders, it is the one that pushed me over the edge.
Let's get one thing straight: The principal reason that so many Enron employees had such a high proportion of their 401K assets invested in Enron stock is that Enron matched employee 401K with Enron stock. Why would Enron (and dozens if not hundreds of other companies) do such a thing? There are a number of reasons, but one of the most important ones is that matching 401K contributions in stock requires minimal cash but still qualifies the company for a tax deduction. If the law is changed so that the ability of companies to match in stock is limited, it does not follow that they are likely to match in cash instead. It is reasonable that many will choose not to match at all or to match less extensively. The assertion to the contrary is supported by neither logic nor evidence.
Quite frankly, I fail to see how Enron employees are any worse off than they would have been if Enron had not matched their 401K contributions at all. More generally, I fail to see how any employee is worse off with an employer contribution in stock than he would have been if the employer had contributed nothing. Perhaps Senator Boxer should consider the fact that her legislation if enacted would have the perverse consequence of preventing matching employer 401K contributions to the very employees who need those contributions the most.
Anyone who chooses to invest in equities has the responsibility to educate himself about what he is doing. This isn't rocket science: Any average person can make informed and reasonable decisions about what to do with his money if he is willing to put forth the effort. Any book, Web site, or financial planner, even those with marginal credentials, will tell you that it's exceptionally risky to invest substantial portions of your retirement savings in the company you work for. Many Enron employees did so anyway with their own 401K contributions, indicating that they either didn't bother to educate themselves about their investments or that they judged that the likely return of their Enron stock justified the risk they were taking.
It's clear that employee investors in Enron, just like non-employee investors, were victimized by a management that failed to disclose the enormous risks that the company was taking; but it's also clear that the Enron employees are substantially responsible for the perilous condition of their retirement accounts. Railing about the senior managers who cashed in millions of dollars worth of Enron stock at inflated prices, the matching of employee 401K contributions in Enron stock, and the lockdown of the Enron 401K plan while Enron stock fell from $16 to $9 a share in October and November doesn't change the fact that many Enron employees, like the Wall Street analysts and the Arthur Andersen auditors, were asleep at the wheel.
-- John Cusey
I've also had employer matching funds, which had to be invested in company stock, melt away from my 401K when my employer filed for Chapter 11 bankruptcy. I had complained about the risk years before, but my complaints were ignored.
Why should an employee's fully vested retirement assets be locked into the investment choices offered by an employer? Why should an employee be forced to quit his job just to gain control of those assets? One simple change to 401K regulations could fix this. Allow an employee to roll over his vested 401K assets to his own IRA account, where he could direct his own investments. Such a transfer should be allowed at least once a year and should not jeopardize the employee's continued participation in the 401K.
-- Larry Jensen
While I agree completely with preventing companies from influencing employees' investment decisions or enjoining them from selling whenever they wish, I'm against government or corporate-mandated maximum single-company investments in all its forms.
What's at stake is the right to make your own decisions, stupid or ingenious, with your own money. Sure, it's a common maxim that you shouldn't place all your eggs in a single basket, but who is the SEC to force that way of thinking upon me? If I want to pour all my money into Salon Inc this afternoon, I should be able to without a broker for a damned nanny telling me I can't because I might hurt myself. In exchange for this right of self-determination, however, comes the responsibility to know what it is I'm putting my money into. I must educate myself about money and investing and look extremely closely at companies I've put my money into.
While I may have sympathy for those who've lost capital in the Enron debacle, either in 401Ks or their stock portfolios, I'm also forced to remind them that there is never any sort of guaranteed return on any investment. You're not even guaranteed your money back. You want security? Open a savings account. Buy a T-bill. Don't invest in stock. And if you do, don't come crying to me when you're broke because you failed to inform yourself that the power-trading company you were deep into was using questionable pro-forma accounting practices to hide its debt. These problems were only found when business journalists took a very close look at Enron's accounting using public documents. It's something any investor could have done. They didn't, and thus reaped the whirlwind. My sympathy abounds, but unless you were one of those prevented from selling, the fault lies not in thy stocks, but in thyself.
-- Gregory Dyas
Following the Enron collapse and 401K debacle, it's time to rethink all of these employer sponsored, tax deductible programs. The retirement plans are risky and discriminatory, the other plans (such as dependent and health care contributions) are both discriminatory and misdirected.
The main problem with 401K plans (and their 403B, Keogh and other brothers) are that they are discriminatory. The type of plan available, rules for contributing to the plan, and even availability of the plan depend on your employer. As with defined benefit plans, if you pick the right employer you will be well off in retirement. If you don't, you might not even have a retirement.
Some plans limit when you can join; you might have to wait a year. Most plans severely limit your investment options, often to company stock and a handful of dubious stock and bond funds that may not even be traded outside of the plan. And 401K plans can limit the amount of contribution by highly compensated employees if a company's lower paid employees are not contributing enough.
But the main problem with these plans is that you must work for an employer that offers these plans. Otherwise, you are limited to an IRA which has flexibility but has significant limitations on the amount you can contribute and whether it is tax-deferred.
And a final, and very significant, issue with these plans is that the income from them is taxed as income when you retire, rather than a combination of income (for the tax-deferred contributions) and capital gains (for the gain). This will be significant if Republicans can repeal the capital gains tax.
The solution to 401K plans? Eliminate the employee contribution part and expand the IRA to compensate. This means raising the maximum IRA contribution and making all contributions tax-deferred. The government argument against expanding the IRA program is that it would decrease tax revenues. It takes very little thought to realize how discriminatory this argument is; those people who only have IRA plans available are usually lower-income and are denied the tax-deferred advantages of more highly compensated employees. Employers can provide their own contributions to pension plans, but employee contributions should be under employee control through IRA programs.
With regard to the other type of plans such as dependent and health care contribution plans, these are both discriminatory and illogical. If you work for the right employer, you can make pre-tax contributions to handle dependent and health care expenses that are predictable.
The amount you can contribute depends on your employer. So a person whose employer does not have this plan, and who encounters a medical emergency, does not get the same tax benefit as someone who has the right employer and wants to set aside pre-tax dollars for optional or cosmetic medical procedures or expenses.
Medical expenses used to be tax deductible, but now they are only deductible if they are extreme. The solution is to eliminate these health care plans and make the items covered by these plans tax deductible. Of course, the government will apply the same argument as for IRA expansion; it will reduce tax revenues. This means that it is OK for some people to have a tax benefit but not for everyone to enjoy that benefit because the government can't afford it.
These plans are preferential, discriminatory, and need to be replaced with programs that are universally available and controlled by the individual. Not likely to happen in these days of special interests and preferential treatment, but one can hope.
By the way, I happen to work for an employer that offers the maximum of flexibility in all of these plans. And I take full advantage of all of the plans that apply to me (I have no dependents, so I don't use the dependent care plan). So I fully recognize the advantage I receive from this preferential tax treatment, and I realize how discriminatory they are. I am not going to not contribute to these plans on moral grounds; I just wish they were available to everyone.
-- John C. Isaacs
