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Sunday, Nov 22, 2009
Employees of the energy trader are furious at the loss of their life savings, but the debacle could finally be the catalyst for long-needed retirement fund reform.
Jan 17, 2002 | When Enron filed for bankruptcy in December, thousands of employees lost not just their jobs but also the money set aside for their retirement. Utility workers, midlevel managers and others who invested in Enron stock via the energy trader's 401K savings plan lost an estimated $1.3 billion.
In all, "about 18,000 to 20,000 employees lost money because their retirement accounts were invested in Enron stock," says Karl Barth, an attorney for Hagens and Berman, a Seattle law firm that's suing the energy trader on behalf of the employees. Chances for quick recovery appear nonexistent; the lawsuits won't be completed for years, corporate bankruptcy filings typically send shareholders to the back of the creditors line and, on Jan. 15, the New York Stock Exchange delisted Enron's stock.
The plight of Enron's employees, in contrast to widely reported stories of top Enron executives cashing out for millions of dollars over the past few years, has made Enron's 401K plan a hot political topic. President Bush, Treasury Secretary Paul O'Neill and several members of Congress have called in recent weeks for an investigation -- "to make sure that people are not exposed to losing their life savings as a result of a bankruptcy," as Bush put it.
Barth aims to hold Enron accountable. The design of Enron's 401K savings plan, he says, contributed substantially to employee losses. Enron limited employees' investment freedom from the start by matching their contributions only with company stock and by preventing employees from selling that stock until age 50.
And just as Enron's problems began to escalate into public view, Enron chose to change administrators of its 401K plan. During the period in which information about the plan's accounts was being transferred from one administrator to another, employees were locked into the 401K decisions that they had already made.
The timing could not have been worse. The decision to change administrators came just before Enron released information about its business that was bound to depress its stock price further.
There's some dispute about the length of the lockdown -- Enron says it lasted from Oct. 29 to Nov. 13; employees claim they couldn't make changes between Oct. 17 and Nov. 19 -- but what's clear is that employees were unable to shift their investments away from Enron stock as its price tumbled ever lower. Specifically, on Nov. 8, when the company restated its earnings from 1997 to 2001, employees who had Enron stock in their retirement accounts could not sell. They had to hold the stock, which was then falling below $9 per share (from a high of $90 in September 2000), until at least Nov. 12, according to Enron, and Nov. 19, according to Hagens and Berman's complaint.
The employees most at risk were those who had expressed the most faith in Enron by putting their own contributions into Enron stock. Meanwhile, says Barth, some Enron executives reportedly were enrolled in a different retirement plan that did let them dump their shares. Executive-selling disclosures for October and November have not yet been released. So it is impossible to know how many executives took advantage of their opportunity. But the mere existence of the loophole has employees crying foul.
While Enron certainly lived at the cutting edge in many of its financial operations, the way its 401K plan was structured was not exceptional -- on the contrary, it was typical. If there's any silver lining to the Enron mess, it may be that the high profile of Enron's implosion may finally focus long overdue scrutiny on how contemporary pension plans and retirement funds work.
